US raises "sanctions risk" concern post India-Iran port contract

US raises
US raises "sanctions risk" concern post India-Iran port contract / bne IntelliNews
By bne Tehran bureau May 13, 2024

The United States has warned of sanctions towards India following its signing an agreement with Iran to operate Chabahar port after several years of delay, it announced early on May 14. 

Iran signed a 10-year contract with an Indian state operator to develop Chabahar port following delays due to threats and disagreements over the project going ahead. However, despite US protests, New Delhi has moved around the Biden administration to sign the deal, which gives them access to Central Asia and effective control over the port. 

“We're aware of these reports that Iran and India have signed a deal concerning the Chabahar port. I will let the government of India speak to its own foreign policy goals vis-a-vis the Chabahar port as well as its own bilateral relationship with Iran,” State Department Deputy Spokesperson Vedant Patel told reporters at his daily news conference.

“I will just say, as it relates to the United States, US sanctions on Iran remain in place and we'll continue to enforce them,” he said.

“You've heard us say this in a number of instances, that any entity, anyone considering business deals with Iran, they need to be aware of the potential risk that they are opening themselves up to and the potential risk of sanctions,” Patel added.

Chabahar Free Zone, Iran's sole oceanic port, holds a strategic regional position. In 2016, Iran and India signed a Memorandum of Understanding (MoU) allowing Indian operators to work in Chabahar. However, the initial contract underwent revisions, and India was unwilling to conclude a long-term contract. The port comes under the wider development of the so-called International North-South Transport Corridor (INSTC), which connects Russia with India via the Iranian railway and road network. The port is also a vital gateway for Central Asian countries and Afghanistan to reach the open sea and connect to Indian imports.  

Under the agreement, India will invest in the port through a Build-Operate-Transfer (BoT) model, bringing in the necessary equipment. Of the total 350 hectares of land, 50 are allocated exclusively to India for loading, unloading, and storage purposes.

The 10-year BoT contract ensures that the port equipment purchased by India will remain at Shahid Beheshti Port after the contract's conclusion. So far, India has invested $20mn out of the committed $85mn, with the final contract signing expected to unlock the remaining investment.

"As and when a long-term arrangement is concluded, it will clear the pathway for bigger investments to be made in the port," Indian Foreign Minister S Jaishankar told reporters in Mumbai.

Mehrdad Bazrpash, Iran’s Minister of Roads and Urban Development said: "We are satisfied with the agreement with India. We consider India one of the world’s major economies, and agreements with this country are part of Iran’s plans."

He added: "The 58% growth target for the country’s transit in 2023 compared to 2022 indicates the Iranian government’s dedication to developing transit and transit infrastructure among regional countries. The continued over 50% growth in transit this year demonstrates the government’s ongoing commitment to this path."

The income generated from the port will be divided between Iran and India based on an agreed financial model. Iran's share is 70% in the import sector, with India receiving 30%. India has a 60% share in the export sector, while Iran gets 40%. ISNA reported that the transit share is evenly split between the two countries at 50%.

India has committed a $120mn investment in strategic port equipment and an additional $250mn to upgrade Chabahar’s transportation infrastructure. These investments enhance the port's capacity and efficiency, enabling it to handle increased cargo volumes and bolstering its role in regional trade.

In 2018, India Ports Global Limited (IPGL) commenced its two-year temporary activity contract in the Shahid Beheshti Port. The purpose of this contract was to equip the port with the necessary equipment and fulfil its obligations to become eligible for a ten-year contract process with the Ports and Maritime Organisation.

At the end of these two years, India was not interested in concluding a long-term contract. Although, during this contract period, six gantry cranes specified in the agreement were delivered to Shahid Beheshti Port, it was reported that Iran was not allowed to use this equipment until the signing of the 10-year contract.

The deal also aligns with the trilateral transit agreement between Iran, India, and Afghanistan, focusing on Chabahar’s role in facilitating trade and transit across the trio. This port is expected to compete with Pakistan's Gwadar port, further positioning India as a critical player in the region's maritime logistics. This railway project stands as a major national endeavour within the Sistan-Baluchestan Province, and its successful completion is poised to bring about significant transformations in commercial relations among various countries.

Iran invited India to conclude a contract three times, which was rejected by the Indians twice in part due to US pressure on the country. India has also requested that a third country have the right to arbitrate in the international court previously to deal with the position it had been placed in. The port, however, was not subject to US sanctions, even during the Trump administration. 

Iran traded $377mn worth of goods with India during the initial two months of 2024, registering a 5.3% y/y increase, as reported by the latest data released by the Indian Ministry of Commerce and Industry.

Importance of Chabahar

During a visit to Chabahar, Rudra Gaurav Shresth, India’s Ambassador to Iran, also emphasized India's commitment to the development of Chabahar Port. He noted that US sanctions had previously slowed the port’s development.

Sarbananda Sonowal, India’s Minister of Ports, Shipping, and Waterways, stated during the contract signing ceremony for equipping and operating the container and general cargo terminals at Shahid Beheshti Port that Chabahar is a valuable port for transit and can significantly facilitate India’s connections with Afghanistan and CIS countries.

He added that Iran and India have a historical and long-standing friendship, asserting that the distance does not affect India’s commitment to implementing its plans once a decision is made.

Ali Akbar Safaei, Managing Director of Iran’s Ports and Maritime Organisation, said: "The senior officials of both countries were determined to finalise one of the most significant port and maritime contracts between Iran and India. This determination, along with the efforts of the two ministers and their accompanying delegations, led to the preparation and finalisation of the contract for equipping and operating the container and general cargo terminals by the Republic of India."

Why Did India’s Policy Change?

Iranian South Asia expert Amin Rezainejad said: “The importance of Chabahar Port in enhancing Iran’s position in transit competitions is well-known. However, why has India changed its long-standing hesitant policy towards developing transit cooperation with Iran?”

He added: “If we rank the US sensitivities towards Iran, certainly, investment by US-friendly countries in Iran, aimed at countering a country with shared hostility towards the US, would rank lower.”

“Based on this, investment in Chabahar Port, which enhances the competitive position of the US and India against China, seems logical, and India’s efforts to invest in Chabahar Port are understandable.”

He added: “This challenges the US's ability to bear high costs to maintain its unilateralism. Consequently, decision-makers in various countries' foreign policies face whether the US still can incur heavy costs to maintain its global hegemony. Iran crossed one of the highest sensitivity thresholds [by hitting Israel] of the US without facing a reaction.”