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Global Risk Insights

Global Risk Insights

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Iran And India Risk Regional Backlash Following Latest Investment Deal

Oil refinery

Following the landmark nuclear arms deal Iran signed with key Western powers earlier this year, investors have been lining up to mend ties with the oil rich Middle Eastern country as it now re-enters the international stage.

India is the latest country to do so, announcing last month that it will build and operate the key Iranian port of Chabahar. The deal has huge ramifications for both Iran and India’s domestic economies, the regional economy, as well as relations between the states in the region – including India and Pakistan.

For Iran, the move is welcome news as President Hassan Rouhani’s reform programme continues to bring Iran back into the world economy after years of painful international sanctions. Iran has already signed new trade deals with France, Italy, China and South Korea, so the latest deal is yet more investment for a country trying to jump start its $400 billion economy.

In a similar vein, the deal is also part of Prime Minister Narendra Modi’s plan to boost India’s economic and strategic ties on the international stage. The deal will allow India to open a transit route to Afghanistan and Central India for Indian goods and provide India with natural gas. The chance to improve relations with its 45 million Shia Muslim population is also a significantly boon. On both sides, then, the development is undoubtedly a positive move.

Economic consequences

The deal is a significant breakthrough for India and the region. As India’s Transport Minister Nitin Gadkari assesses, the port boosts the country’s trade ties not only with Iran, but also Afghanistan, other Central Asian nations and Russia.

The chance to move goods to Iran and then onwards to Afghanistan and Russia is a key element of the plan. This port will also give sea access to Afghanistan, a country Modi plans to visit this month in order to sign a trilateral trade agreement between India, Afghanistan and Iran.

However, the deal could be met with opposition due to the involvement of China; Beijing has already pledged $70 billion worth of FDI for Iran’s petrochemical industry by 2025 and will be wary of the closer links being forged between New Delhi and Kabul. Related: Saudi Arabia To Tax Foreign Residence As Oil Crisis Continues

Conversely, India and China are economic rivals, and ties have frayed even further in recent years due to China’s economic success. Given this, Iran’s significant deals with both India and China may cause some conflict down the road, with Tehran likely having to perform a delicate balancing act.

What does it mean for Pakistan?

Another significant neighbour the deal is likely to affect is India’s long-time adversary Pakistan. Indeed, one of India’s main motives behind the deal is to bypass the Pakistani port of Gwadar and the transport corridors linked to it. Related: Lebanon Losing The Levant Basin Battle By Default

There are three main reasons for this: firstly, China has invested heavily in the Pakistani port; secondly, the port is based in the unstable Balochistan region, where security risks are high due to the presence of the Taliban; and finally, any way to avoid giving money to Pakistan while still maintaining its economic transport goals is an advantageous move for India in the eyes of its leaders.

A boon for India, a risk for the region?

The deal will therefore help India avoid giving funds to both Pakistan and China while improving ties with Afghanistan. In multiple ways, this is a solid victory for India. Indeed, it is clear that the agreement for Chabahar between Iran and India is very beneficial for both economically, and will do well to increase ties between a number of countries in the region. In term of regional stability, however, the deal may raise tensions further and pit old foes against one another even more.

By Rayhan Chouglay via Globalriskinsights.com

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  • Iranian Expat on June 13 2016 said:
    China is irrelevant to this particular project. However, They can be a Plan-B for Iran if India does what it usually does and kowtows to its American or Israeli masters, and starts to drag this project for many years. India, in fact, can learn a thing or two about foot dragging from Russia.

    Pakistan is irrelevant to just about everything, as they are a basket case of backward Sunnis. They can be described as a neighbor nobody wants, but has to.
  • Bill Simpson on June 20 2016 said:
    The Iranians are smart enough to remember what happened to them when a superpower overthrew their government. They aren't about to become too dependent on the next superpower - China, for anything. India can prevent that from happening.
    The Iranians know that a Chinese superpower which dominates all of Asia, might even threaten Iran someday. A developed, prosperous India would prevent that. Better safe, than sorry. And don't put all your eggs in one basket.

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