As geopolitical shifts and external pressures impact the regional landscape, the once-promising economic ties between India and Iran face considerable challenges.

Establishing new trade patterns and fostering connectivity across Eurasia has become a daunting task, hindering the positive trajectory of their economic relationship. The current regional geopolitical environment significantly hinders bilateral trade between Tehran and New Delhi.

India’s burgeoning relationship with Washington has emerged as a significant hurdle, placing New Delhi in a precarious position as it strives to navigate between the US-led and China-led blocs. Complicating matters further, Iran finds itself targeted by global and regional powers, and its economy and social fabric are severely impacted by sanctions imposed by the US and its allies. These intertwined factors create additional complexities for India as it seeks to strike a delicate balance amidst these geopolitical challenges.

Washington’s sanctions on Tehran under CAATSA led to the stoppage of oil imports from Iran in 2018, hurting India’s energy security. Nonetheless, both nations are finding alternative trade patterns and are interacting on platforms like SCO to boost their commercial ties in the current geopolitical environment.

Oil Trade Resumption

Iran remained a reliable energy partner for years until New Delhi backed out under pressure from US President Donald Trump. The Trump administration imposed CAATSA sanctions on the clerical regime, causing New Delhi to stop purchasing oil. Nevertheless, Tehran applauds India’s stance on Ukraine and continues to buy oil from Moscow, resisting Washington.

According to the Hindustan Times, Iranian ambassador Iraj Elahi said, “India resisted the pressure of the West to buy Russian oil and hoped that Delhi starts buying oil from Iran as well.”

Iran relies on New Delhi to resume crude oil imports, strategically evading American pressure by exploring non-dollar payment methods to counter-sanctions. As the Islamic Regime needs a big consumer, it will satisfy 80% of the energy needs of New Delhi at a low cost if the oil trade resumes.

The shift away from the US Dollar

New Delhi and the Islamic Republic have joined the de-dollarization drive together with Beijing. Several nations are considering using their national currencies to substitute US dollars in international transactions. The Islamic Republic seems to be taking a cue from India by prioritizing trade in its currency.

According to Energyworld, the Indo-Iranian security bodies discussed shifting away from the dollar and using local currencies to settle payments in their May meeting in Tehran. Iran has once again presented India with assistance in meeting its energy needs using the rupee-rial mechanism.

Using local currencies between the two can bolster trade and economic growth. By inserting the rial-rupee mechanism, bilateral trade can reach up to 30b$. Nevertheless, halting Iranian crude oil exports through the Rupee-Rial framework due to US sanctions has caused payment delays for Indian exporters due to Rupee depletion at Iran’s Central Bank.

The Indian banks, on the other hand, have declared the system used for sending payments through a third party is illegal and an unauthorized method of getting payments from the Islamic Republic. Iran and New Delhi may face increased exchange rate volatility, affecting trade, investment, and capital flows.

Thus, to facilitate trade with Tehran, India may adopt a safe mechanism to trade with Iran, such as INSTEX (Instrument in Support of Trade Exchanges),  a channel used by the EU-3 to trade with Iran because it mitigated the effect of Western sanctions.

Benefiting from the Shanghai Cooperation Organization

India is the first South Asian country to host a SCO summit. This year’s Indian presidency has significantly impacted India’s reach into Central Asia. One of India’s primary goals in joining the Shanghai Cooperation Organization is to maintain close ties with Central Asian countries.

According to an ORF report, India sought other options for connecting with Central Asia, which is rich in hydrocarbons and has strategic significance. Hence, SCO provides a platform for India to secure its energy-related interests.

With Iran’s inclusion, the SCO can become a means for India and Tehran to enhance connectivity and trade opportunities in Central Asia and Europe by developing ship, land, and rail routes via Chabahar Port and the International North-South Transport Corridor.

In the meantime, India plans to join the US-led NATO- plus to strengthen defense cooperation. New Delhi will have an advantage over seamless intelligence sharing, advanced military technology, and a stronger alliance with the US as a bloc member.

However, it would be difficult for India to balance the Chinese and Russian-led bloc, considered an anti-western alliance, and the US-led bloc. Hosting the summit could jeopardize India’s admission to the NATO-plus bloc.

Likewise, Islamic Regime’s admission to the SCO expands the bloc’s reach into the Middle East region. Iranian President Raisi called SCO membership a strategic move. Iran sees membership as a means of increasing external legitimacy, fostering security-oriented regionalism, and advocating the multipolar world order.

Besides that, Tehran’s abundant oil and gas reserves may make it a major supplier of goods for the member countries. Working closely with other SCO participants like New Delhi, Iran gets the opportunity to promote cooperation in the energy sector actively.

Finally, SCO membership allows the Islamic Regime to avoid US-led sanctions, providing a way to strengthen economic convergences. However, Washington’s comprehensive sanctions on Tehran have hampered Iran’s ambitions to become a key energy supplier to India. Due to the risk of economic consequences, New Delhi will probably stick to its policy of avoiding sanctions violations.

Energy Security and India’s Independent Foreign Policy

Energy security appears to be the primary concern for India’s energy-starved economy to maintain its economic growth. India has been juggling its relations with energy-rich Iran and the United States in this setting.

Although India claims to pursue an independent foreign policy, a closer examination reveals that India’s foreign policy towards Iran is impeded by US pressure. While India strives to be recognized as an emerging power, it may be time for India to begin making decisions independent of US pressure.

As for Washington, New Delhi is essential in monitoring Chinese activities in the Indian Ocean. This gives New Delhi a significant advantage in terms of negotiating favorable terms for limited economic cooperation with the Islamic Republic.

To conclude, as new shifts are occurring in the current geopolitical environment, they create significant opportunities for India and Iran. Both are working to resurrect the oil trade by using local currencies to avoid US sanctions. Joining platforms like the China-led SCO is a way out for both states. It is imperative for Tehran and New Delhi to boost cooperation, especially in the energy sector, to sustain economic growth and achieve their goals of becoming major economic powers.

*The author is a student of International Relations at the School of Politics and IR at QAU, Islamabad Pakistan

**The opinions expressed in this article are solely those of the author and do not reflect the views or position of The Diplomatic Insight. The organization neither endorses nor takes responsibility for the content of this article and its accuracy.

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