Observing the entire imbroglio play out in the Middle East, one gets the impression of a replay of events in Iraq or Libya, followed by a sensation of dread. Just like the bogey of WMDs, the accusation against Iran, led by the US for attacks on Saudi Arabia’s Abqaiq oil refinery and Khurais oil fields, appears to be based more on prejudice and less on evidence.

Veritably the spark for the current crisis was provided by the attack on the Saudi Arabian oil company, Aramco, the tinderbox is the enduring animosity between the US and Iran. Relations between the US and Iran have ranged from limited to non-existent over the past 40 years.

Through this summer, senior American officials kept making statements to link Iran with Al Qaeda. It was speculated that this connection to the Al Qaeda was being invoked to justify the use of use military force against "associated forces" responsible for the 9/11 attacks, by the American President without seeking Congressional approval.

However, the strategy to connect Iran with Al Qaeda and justifying the application of presidential authorization for use of military force has not had buyers within the US. Parenthetically with past American behaviour in the region as a precedent, comments from a fabricating President Trump are already casting doubts on allegations of Iran’s involvement in the attack.

Is Iran isolated?

Many traditional US allies do not appear to support the idea of isolating Iran and favour the 2015 Joint Comprehensive Plan of Action (JCPOA) nuclear agreement. In an indication of rising disenchantment of global powers to US multilateralism, China, Russia and Japan declared that they had not seen any intelligence showing Iranian involvement in the attacks.

Also read: Expected India to Be More Resilient to US Pressures, Says Iran's Foreign Minister

While many nations feel that the unilateral imposition of US sanctions on Iran is unfair, it has been difficult to practically circumvent American wishes on the issue. Following the Trump administration’s withdrawal from the nuclear deal, Germany, France and the UK had set up a special payment channel INSTEX (Instrument in Support of Trade Exchanges) to circumvent US sanctions. The payment channel theoretically shields European companies from penalties.

However, businesses were disinclined to trade with Iran as they fear that non-compliance with US sanctions could result in losing access to the American market. The National Iranian Oil Company set up the Iranian energy exchange (IRENEX) to permit Iranian private companies to buy the crude and sell the purchased cargo to foreign customers, but this too hasn’t worked out.

Given its lack of choices, Iran is pursuing a closer relationship with China, despite the country’s reputation as a predatory lender. Beijing is doubling-down on its strategic partnership with Tehran, ignoring US efforts to isolate the Islamic Republic from global markets. China has committed to invest $400 billion in Iran’s energy-related manufacturing sectors over the next 25 years.

CAATSA sanctions and implications for India

US withdrawal from the JCPOA last year and the enactment of Countering America’s Adversaries Through Sanctions Act (CAATSA, P.L. 115–144, July 2017) contains provisions that could penalise Indian individuals and companies for dealing with the ‘targeted’ sanctioned countries through application secondary or extraterritorial sanctions.

In May 2018, after the US decided not to extend the six-month secondary sanctions waiver for countries importing Iranian oil India stopped all oil imports from Iran, increasing its imports from the US. India, bought about 184,000 barrels per day (bpd) oil from the US over November 2018 to May 2019, compared with about 40,000 bpd in the same period a year earlier; a surge of nearly a 100 million barrels.

Watch | #BeyondTheHeadlines | As Trump Pushes for War, India Needs to Speak Out

In June 2012, India was given a waiver against sanctions measures by the US. This time as well India should build a case for continued financial relations with Iran based on two factors. First, that cutting down crude imports from Iran will impair India’s energy-security needs affecting inflation and slow down economic growth. And secondly, that in the absence of Indian infrastructural development projects in Iran, the vacuum created is likely to be filled by China amid fast-changing geopolitics.

The unilateral application of extra-territorial sanctions on third countries and their entities as a means of enforcing US foreign policy goals has been strongly disapproved by the international community. Nonetheless, it is in India’s self-interest to introduce domestic legal countermeasures to prevent Indian companies from automatically complying with unilateral extraterritorial American sanctions, so that these laws are not enforceable on Indian entities.

Iranian banks have shown keenness to open branches in India for which the Reserve Bank of India (RBI) is yet to give necessary permissions and regulatory clearances. Even if one gets around the problem of sanctions, payment for Iranian crude continues to be a big hurdle.

Prevailing US responses and the effects of sanctions on Iran

In the aftermath of the Aramco attacks the Trump administration issued a new round of economic sanctions against Iran, targeting the Central Bank of Iran and the National Development Fund of Iran, preventing them from purchasing dollars.

Sanctions have had an adverse effect on the Iranian economy which shrunk by 3.9% in 2018 by IMF estimates. In 2019 IMF forecast that it will shrink by a massive 6%. The costs of food and medicines are affecting the lives of ordinary Iranians. The sanctions have prevented any rise in foreign portfolio investment into Iran. Foreign companies like Daimler, Peugeot and Total have closed operations in Iran. International insurance agencies are not extending risk covers as a result of which shipping companies are not able to transport Iranian crude. Iran faces also the devaluation of the Rial.

India’s policy options

India’s policy towards Iran and developments in the Middle East has been largely reactive. By any stretch of imagination, this is not the best strategy especially given Indian interests in the region to meet its energy requirements and the presence of a large contingent of Indian workforce in many countries of the Middle East.

Also read: Trump Sees Kashmir – and Pakistan Too – Through the Prism of Iran

India should not so easily forgo the goodwill and advantage that it enjoys with Iran, to its strategic competitor, merely to accommodate the whims of the Americans. While India has halted purchasing Iranian crude completely since May this year when it was announced that Significant Reduction Exception (SRE) extension would not be extended, China continues to buy an average of 161,000 b/d, as of Oct 2019 from Iran. Albeit this has come down from 828,000 b/d in October 2018, China remains Iran’s largest single buyer.

Despite the US sanctions, China remains a large investor in Iran. Recently Iran and China expanded their 2016 25-year strategic partnership which involves a series of multi-sector agreements. Of course, there have been glitches such as the CNPC withdrawal from Iran’s South Pars gas field but the Chinese state commitment remains.

It may be noted that in the past there have been instances of Chinese companies suspending work in the wake of sanctions only to resume subsequently. China National Offshore Oil Company (CNOOC) which had invested in Iran’s North Pars Gas field suspended work in 2011 resumed after the sanctions were lifted in 2016. CNPC’s current withdrawal may be a temporary manoeuvre.

While Iran seems assured of continued Chinese interest and support, this sort of reassurance is something that India has failed to provide. Iran has historically relied on India’s support through the various cycles of sanctions, but a certain disenchantment has crept in given what it perceives to be India’s lack of ‘resilience’ in the face of Washington’s bullying attitude.

Iran’s foreign minister Mohammad Javad Zarif recently voiced this disillusionment when he stated that, “India has certainly taken a stance against the sanctions… so that’s been encouraging, (but) of course, we expected our friends to be more resilient vis-a-vis US pressure.”

India did try to work out an alternative payments’ arrangement under the sanctions’ regime to import at least some Iranian oil which has been zero since May this year. Iranian private bank Pasargad, opened a branch in Mumbai in 2018 to facilitate Rupee-Rial trade. It was being planned that payments would also be routed through UCO Bank and IDBI Bank like done previously. However, the US has been pressuring India to prevent the escrow account mechanism from materialising.

In fact, recently US Treasury Secretary Steven Mnuchin met the Reserve Bank of India, governor Shaktikanta Das to garner support for US sanctions on Iran. China, on the other hand, might indeed manage to maintain a hard currency escrow account with an estimated value of about $20 billion ostensibly to pay for China’s infrastructure projects.

India must make most of the exemption granted by the US under section 1244 (f) of the Iran Freedom and Counterproliferation Act (IFCA) which allows work to continue at the Chabahar port for the purpose of “Afghanistan Reconstruction.” Although India is developing the first phase of the Shahid Beheshti Port in Chabahar, the pace and scope of the work has reduced because of reluctance to finance projects in Iran.

Also read: India Seems to Be Toeing the US Line on Chabahar. Here's Why

This is because Indian banks and private sector view Iran as a controversial market prone to financial and reputational risks. The Indian government should address these fears among investors and explain the exemptions from sanctions involving the development of the Chabahar port.

Finally, India should forcefully and consistently cite the lack of UN sanctions to continue bilateral trade with Iran while at the same time employ its special relations with both the US and Iran to mediate cordial relations between them, or at the least try to revive the JCPOA. In conclusion, India needs to take a leaf out of Beijing’s playbook and do much more. Or else, despite cooperating with the US, India may receive the short end of the stick.

Vaishali Basu Sharma was a consultant with the National Security Council Secretariat (NSCS) and tweets at @basu_vaishali.

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