Iran relies on India to develop its only oceanic port

Iran relies on India to develop its only oceanic port
India signed an agreement with Iran under which it would invest $500mn in giving the port a major upgrade.
By William Conroy in Prague August 22, 2017

In late May last year, Narendra Modi, the first Indian prime minister to visit Iran since 2001, declared that the friendship between the two countries was “as old as history”.

Modi’s flattery was certainly not fanciful – India has the world’s second largest Shia population, some 45mn people, and Iran has significant influence over them – but at the same time New Delhi’s strategic eye was focussed more on rivalling growing Chinese trade incursions into the Islamic Republic, and China and Pakistan’s designs on Afghanistan.

One of Modi’s big pragmatic considerations was Chabahar on the Gulf of Oman, the sole Iranian oceanic port, which offers clear shipping access to the Indian Ocean. With the land route to Afghanistan through Pakistan unavailable to the Indians given historically thorny relations, New Delhi’s intention is to build up Chabahar port and thus develop an unhindered sea-road/rail export corridor that would run straight into Afghanistan via Iran, while also offering branched off routes into Central Asia and the South Caucasus. What’s more, the Indians also aspire to eventually use the link to bring gas down from Central Asia and transport it over to India.

Just prior to the Modi visit, India signed an agreement with Iran under which it would invest $500mn in giving the port a major upgrade that would include the construction of two terminals and five berths. The Indians also secured the right to lease and operate the infrastructure for 10 years.

Progress in realising the investment has, however, been painfully slow since then. Analysts have detected myriad reasons for the lack of action: Iran’s distrust of India stemming from the way it sided with Washington in introducing the nuclear sanctions that ran from 2011-2015; famously slow Indian bureaucracy; unpaid billions of dollars still owed by India to Iran for historic oil deliveries; and nervousness among Indian investors that their port investment could be damaged by fresh sanctions imposed by the Trump administration.

But on August 8 there was something of a breakthrough. Tying in neatly with the swearing-in of Iranian President Hassan Rouhani for his second term, India finally announced financing for developing Chabahar.

Indian Minister for Road Transport and Highways Nitin Gadkari said during his visit for the inauguration that India had cleared the way for $150mn of export-import bank financing to revamp and expand the port. India, he said, would equip and operate two berths in Chabahar Port Phase-I with capital investment of $85.2mn and annual revenue expenditure of $22.95mn on a 10-year lease.

Some shipping operations, he anticipated, might begin as early as 2018. Adding to confidence that a leap forward is around the corner, Indian shipping ministry officials said that they intended to assist in setting up a private shipping company branch in Iran to expedite operations.

Crucially, Gadkari said India would not retreat from its Chabahar agreements with Iran, even should Washington step up its sanctioning of the Iranians.

Competing corridors

Iranian Transport Minister Abbas Akhoundi, who held discussions with his counterpart, briefed the media that the two sides also discussed the financing of the proposed Chabahar-Zahedan rail link. Zahedan is located just 41km south of the tripoint of the borders of Iran, Afghanistan and Pakistan. Akhoundi said the Indians had agreed to propose their form of participation this September.

During the Modi visit in 2016, Indian state-owned company IRCON and Iran’s CDTIC signed a memorandum on the construction of the Chabahar to Zahedan railway. Their project, worth $1.6bn, was to be financed by IRCON, officials said at the time. 

Akhoundi also commented: “For increasing the competitive advantage of Iran's transit corridors to the north, we have agreed on a 50% [tariff] discount on Indian goods [but] of course this is not a one-way discount, but a multilateral commitment between Iran, the Republic of Azerbaijan and Russia to better promote this [multi-route] corridor among other competing corridors.”

Yet China is also gaining a pronounced presence in Iran. In late July it signed a $1.5bn contract to finance the electrification of nearly 1,000km of high-speed track between Tehran and the second city Mashhad.

Across Central Asia, Pakistan, Russia, Central and Southeastern Europe and other regions, China is far busier still, rolling out projects under the umbrella of its One Belt One Road (OBOR) trade and trade infrastructure project, set to provide untold billions in investment financing.

Chabahar, designated a free trade zone, is supposed to be India’s direct response to China’s and Pakistan’s joint investment in the Pakistani Arabian Sea port of Gwadar, located just 80km from the Iranian port. Gwadar is a key element of the corridor linking Pakistan, Afghanistan and China under OBOR.

Iran is also very keen on developing Chabahar – partly because it would ease the burden on the seaport of Bandar-a Abbas, located at the entrance to the Strait of Hormuz, and also partly to boost its own greatly under-developed trade with Afghanistan – but the Indians may get little joy if they push Tehran to take sides in New Delhi’s great geopolitical game with Beijing and Islamabad. Iran cannot afford to be circumspect about Chinese FDI, and the OBOR programme even envisages Iran as a key trade node that could trans-ship goods from China to destinations in the Middle East and North Africa.  

It will also not be lost on India that in June this year the Iranians and Pakistanis announced that they are looking to sign a free trade agreement. Iran, it seems, is prepared to take on the tall order of keeping everybody happy at the same time.