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10 February 2012, Gateway House

Iran looms large on Indo-U.S. relations

Iran may become a litmus test for India's relationship with the U.S., where New Delhi must deftly balance its strategic relationship with the U.S. along with its energy interests in Iran.

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Iran is casting a long shadow over India’s relations with the United States as New Delhi struggles to balance U.S. sanctions against Iran and its own energy needs.

Caught between Scylla and Charybdis, India is being squeezed. Loud voices in Washington are demanding that India wean itself off Iranian oil. That would mean a definite blow to the Indian economy since Iran is India’s largest supplier after Saudi Arabia.

India’s Foreign Secretary, Ranjan Mathai, got an earful on Iran while on a three-day visit to the U.S., and even when he wasn’t in meetings, he was being told indirectly that India must decide where it wants to sit – with the United States or with Iran, the pariah. The “with-us-or-against-us” vocabulary has once again permeated the atmosphere. Mathai faced intense questions from senators and congressmen on Capitol Hill on whether India planned to abide by the will of the West.

The main purpose of his visit was to restore momentum in the India-U.S. bilateral relationship and set the agenda for the strategic dialogue scheduled to be held in June or July in Washington. But the visit was hijacked by problem areas; be it the Iran sanctions or India’s nuclear liability law. He had a lot of explaining to do in the heated political climate of Washington.

U.S. Senator Robert Menendez of New Jersey was perhaps the most overt face of the sentiment prevailing on Capitol Hill regarding India’s attitude on Iran sanctions. Posing questions to Nancy Powell, the designated U.S. ambassador to India, the senator demanded that she press India to abide by the sanctions. “The Indian government, which is one of Iran’s largest crude customers, seems to be rebuking the sanctions and looking for workarounds, including considering payments in gold and transactions that detour around the central bank of Iran which, at the end of the day, still is helping the Iranian government have the resources to fuel their nuclear ambitions,” he stated.

He said while Japan and South Korea – also large consumers of Iranian oil – were trying to look at alternative sources for oil, India was finding ways to skirt the sanctions. “Will you carry the message to New Delhi that this is a policy priority for the United States and that we will not hesitate, as appropriate, to pursue the law as it exists?” he declared. Powell said it would be her priority to give the Indian government the message as she tried to explain that India indeed shared the U.S. policy goal of preventing Iran from acquiring a nuclear weapons capability.

But Menendez countered that the U.S. needed “more than their (Indian) goodwill or sharing our goals. We need their actions to join us and the rest of the international community in that regard.”

The message was repeated in a more diplomatic language to Mathai as he tried to create understanding for India’s dilemma. Iranian oil is vital to India’s energy security and options are limited. But he was repeatedly told that India must look at alternative suppliers. Some in Washington go so far as to say that India has had more than three decades to deal with the problem when the U.S. first sanctioned the Iranian regime. What they forget is that India did not enjoy favourable ratings in the U.S. at that time and had no compulsion to follow U.S. actions.

The situation today is far different. India and the United States have come much closer and share many strategic goals. They have shared interests in Asia and a growing defence relationship has created new options for the future. But they still have seminal differences, as the Iran sanctions issue illustrates. The problem is that they cannot agree to disagree on this one because of the fever pitch in Washington. Iran may just have become a litmus test for the India-U.S. strategic relationship.

It didn’t help that a Wall Street Journal report said that India “increased” its import of Iranian oil to become its largest customer last month. Indian imports rose to 550,000 barrels a day in January 2012, up 37.5 percent from December 2011. Ironically, the rise was a result of a 50 percent cut in Chinese imports because of a price dispute.

It is cheaper for many Indian refineries to refine Iranian crude because that is how they are set up. What is not clear is how long Iran can delay payments in hard currency and survive on rupee payments. India has reportedly set up a rupee payment system through the Kolkata-based UCO bank, which has no exposure in the U.S. and is therefore protected from U.S. sanctions.

Iran’s Central Bank, however, is under U.S. sanctions as Washington tries to sever Iran from the world financial system, making it harder for other countries to make payments. Even the European Union has placed an oil embargo against Iran, which is expected to come into full-play by June.

The U.S. Administration is hoping to see a gradual decline in Iran’s revenue as sanctions begin to bite and Teheran is forced to bend on the nuclear issue. Pressure from Israel and periodic hints that it might take unilateral military action against Iran’s nuclear installations have added to U.S. President Barack Obama’s difficulty in taking the diplomatic route to Iran.

But there is a faint possibility that Obama may not go all the way on sanctions.

Under the new sanctions passed late last year, Obama will get reports from the U.S. Energy Information Administration on oil prices, production and how oil markets are coping. The first report is due on February 29 and then once every two months. While the sanctions are designed to hit Iran, they could just as well disturb world oil prices, raising them for all countries, including the U.S.

Obama can’t afford to have a serious jump is U.S. gasoline prices and risk a popular uproar. Anything over $5 a gallon means political trouble. The same Republicans who are attacking him for not being hard enough on Iran will turn on him for high gas prices. Since it is an election year in America, anything goes. Logic is not a necessary ingredient.

Obama could argue that serious disturbances in the world economy would impact the fragile U.S. recovery; therefore, diplomacy should be given more time. This is the route preferred by India and many other countries, including Japan, although these preferences are only obliquely articulated anymore.

The second determination Obama must make is whether countries such as India which buy Iranian oil have “significantly reduced” their imports. This can be tricky terrain because the “determination” and naming of countries or entities has often been a political decision taken by the U.S. Administration. For several years various U.S. presidents “determined” that Pakistan was not making a nuclear bomb even though there was ample evidence. The covert war, which Pakistan helped the U.S. wage against the Soviets in Afghanistan, was a more important goal for Washington.

Since India doesn’t acknowledge “foreign laws” and abides only by UN sanctions against Iran in theory, the determination whether India has “reduced” its imports would be made based on figures collated by U.S. officials. “They will do what they have to do,” said one diplomat familiar with the issue.

The coming months would clarify the picture but in the meantime India must brace itself both for high oil prices and pressure from Washington.

Seema Sirohi is a Washington-based journalist and analyst.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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