India walking away from its place in the sun

The government has to be more energetic in promoting Indian economic interests even if this means treading on the toes of “strategic partners” like the United States...




11 June 2009
The Hindu

India walking away from its place in the sun

The government has to be more energetic in promoting Indian economic interests even if this means treading on the toes of “strategic partners” like the United States.

Siddharth Varadarajan

China and Iran recently announced the signing of a $4.7 billion deal for the development of the South Pars gas field and the Russian firm, Gazprom, expressed an interest in investing in the proposed Iran-Pakistan gas pipeline but Indian prospects of consolidating a potentially promising energy relationship with Tehran appear to be receding by the day.

As if voting itself off the Iran-Pakistan-India (IPI) pipeline project were not bad enough, New Delhi has been a mute spectator to the mounting American pressure on Indian companies to stop dealing with the Islamic Republic. So diffident is the Manmohan Singh government about India’s rise and so beset are our diplomats with short-term considerations that the larger strategic picture involving Iran and the global energy linkages evolving around it seem to have completely passed us by.

India’s myopic Iran and energy policy are not so much the products of American pressure as of an institutional unwillingness to leverage economic interaction around the world for wider strategic gains. A small example will suffice. In Bolivia, the public sector company, Hindustan Aeronautics Ltd., is in danger of losing a contract for the supply of Dhruv advanced light helicopters because the Ministry of External Affairs does not want to extend a line of credit for the supply of products that come under the Ministry of Defence. India woke up to the importance of the small Andean nation in 2007 when the Evo Morales government chose an Indian company, Jindal Steel & Power Ltd., for the $2.1 billion iron ore-steel plant project at El Mutun. HAL has already sold the Dhruv to Ecuador and the Bolivian deal would help consolidate its position as a supplier of affordable helicopters to countries in Latin America that want a cheaper alternative to the American Bell.

But someone in the Indian establishment evidently does not agree. The Business Standard reported this story last month and when I asked the concerned official in South Block what the problem was, he said: “Please ask the Defence Ministry. The MEA is not in the business of selling helicopters.”

No one expects India to embrace Calvin Coolidge’s dictum that “the business of America is business.” But if the government is unwilling to fight for the country’s economic interests abroad, why should the corporate sector show more courage?

In 2007, Essar walked away from a billion dollar refinery project in Iran after the Governor of Minnessota — where the firm was interested in securing concessional bonding worth $60 million for a $1.4 billion steel acquisition in the American state — threatened to withhold support. And last week, there were reports that Reliance Industries Ltd., India’s largest private sector oil refiner and exporter of crude products, has backed out of supplying Iran with petrol and diesel under pressure from the United States.

As matters stand, there are no international or even domestic American restrictions on the import or export of hydrocarbon products from or to Iran. But in an attempt to provide greater “bite” to President Barack Obama’s as-yet-invisible diplomatic overtures to Iran on the nuclear issue, a group of influential legislators on Capitol Hill is seeking to penalise companies around the world for selling refined products to Tehran or otherwise augmenting its capacity to refine by itself.

Despite being one of the world’s largest producers of crude oil, Iran’s refineries are unable to process enough product for domestic use, forcing the country to rely on imports to service its retail outlets. And as the U.S. seeks to tighten the screws on Iran in its standoff over the country’s civil nuclear energy programme without pushing world crude prices up, Iranian petrol and diesel imports are seen as the Islamic Republic’s Achilles Heel. Limiting or banning the sale of petroleum products to Iran would cause tremendous hardship and generate popular unrest against the government. As a Senator, this is precisely what Mr. Obama came out in favour of in 2008. The United Nations Security Council may not easily approve such sanctions but that hasn’t stopped the U.S. from threatening unilateral sanctions on the rest of the world.

Last December, eight Congressmen led by Brad Sherman zeroed in on Reliance, demanding that the U.S. Exim bank suspend $900 million worth of loan guarantees being extended to the Indian company for expansion of its Jamnagar refinery. RIL has been a steady partner of Iran in the energy sector, purchasing its crude and selling vast amounts of refined products that amounted in some years — according to the Congressmen — to as much as 30 per cent of annual Iranian petroleum imports.

In 2007, RIL was forced out of the Iranian market after American financial pressure on Banque Paribas led to the French bank refusing to confirm the necessary Letters of Credit. The public sector MRPL stepped into the lucrative market in 2008, contracting to sell 250,000 tonnes of diesel to the National Iranian Oil Company with settlement in euros. Later that year, RIL worked out a way to re-enter the Iranian market.

The targeting of the Indian company last December represented an upping of the Congressional ante but the worst was yet to come. In April this year, Mr. Sherman and his colleagues introduced the Iran Diplomatic Enhancement Act in the House of Representatives threatening sanctions on all third country suppliers, brokers, insurers and tankers carrying gasoline to Iran. Companies building refineries in Iran would also be penalised. In May, a similar bill was introduced in the Senate. Though the new bill’s backers are not keen to push the law through immediately, they see it as providing greater muscle to Washington’s new strategy of offering the Iranians the chance of dialogue with the sword of catastrophic sanctions hanging over their heads.

Even without the U.S. law being passed, the threat of American punishment is often deterrent enough for companies. Especially those companies whose home governments prefer not to speak out against the extra-territorial application of American law.

When the controversy over Essar’s proposed Iranian refinery surfaced in October 2007, the GOI should have stepped in to protect the legal right of an Indian company to operate in both Iran and Minnesota. In the event, Essar buckled. After discussions with the Minnesota governor’s office and the U.S. State Department, the firm declared that “no investment or firm commitment will be made in Iran, unless and until permitted to do so under the applicable U.S. or international laws.”

In considering the scale of its involvement in the Iranian hydrocarbon sector, India obviously needs to factor in the prospect of Iran’s relations with the U.S. sharply deteriorating in the months ahead. But it should also be mindful of the possibility that those relations could actually improve. Tehran’s rapprochement with Washington could flow from the defeat of Mahmoud Ahmadinejad in next week’s presidential election or from a dramatic new overture by Mr. Obama. Perhaps in anticipation of dramatic change of one kind or another, international preparations seem to be under way for the smooth incorporation of Iranian energy in existing hydrocarbon networks of circulation and power. The U.S. and Europe would like to use South Pars gas as a feeder for the Nabucco pipeline so that European dependence on Russian supplies comes down. For that reason, Russia would rather help to orient Iranian supplies eastward, towards India and China. Beijing is already working on the same strategy, and is thinking both of LNG shipments as well as extending the Iran-Pakistan pipeline northward into China now that India does not seem at all enthusiastic about participating in the project.

Triple blunder

India committed a triple blunder when it deliberately stayed away from the tripartite negotiations on the IPI pipeline last year partly for fear of not offending the U.S. and partly due to its insecurities vis-À-vis transit through Pakistan. First, it is missing out on a promising source of cheap energy at a time when its own energy needs are growing and the worldwide decline in oil prices means it has a better negotiating hand. Second, it is missing out on the possibility of building co-dependency with Pakistan. For all the law and order problems in Baluchistan, the physical security of the IPI pipeline would have been guaranteed both by technological and political means, while the involvement of Russian and Chinese investors in the pipeline and downstream projects would have provided the political cover against supply disruptions by the Pakistani state. The IPI pipeline may even become a catalyst for wider energy or economic linkages between Delhi and Islamabad, which would be excellent for the bilateral relationship. Third, by staying away from the pipeline, India has effectively freed up the vast gas acreage of South Pars for competing bids from elsewhere, especially China and Europe.

If it wants to be taken seriously as a “major power,” India needs to demonstrate an ability to defend its economic interests in a dynamic, competitive environment that presents risks as well as opportunities. India is fortunate that its rise is occurring at a particular global conjuncture, when developing countries are looking for alternative linkages. It must have the boldness of vision to seize openings as and when they present themselves and not get bogged down by fear and diffidence.