Chabahar port seems closer to realization than ever despite challenges

The signing of a long-term "main contract" for the development of the Shahid Beheshti Port Terminal in Chabahar this week between India Port Global Ltd (IPGL) and the Ports and Maritime Organization (PMO) of Iran was anticipated.

Pressure had been mounting on Iran to decide on the fate of Chabahar port and its ties with India since New Delhi became part of the India-Middle East Economic Corridor (IMEC) in September 2023.

IMEC, once developed with support from the US and Saudi Arabia, risked isolating Iran from the expanding trade route between India and Gulf nations, as well as between India and Central Asian nations.

Iran seems to have waited too long to leverage its perceived geographical and strategic advantage on the Indian Ocean as a midpoint.

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Tehran has long tried to use Chabahar to keep both India and China interested in the desert region. It allowed China to develop several infrastructural assets close to its border, even as it bombed Pakistan, and set stiff terms for India to retain its foothold. The ten-year lease on the port signed in 2015 was about to end and had to be renewed annually.

Over these years, Tehran consistently accused New Delhi of going slow on investments in Chabahar, arguing that India was unwilling to spend dollars in the Iranian market to make the investments. Starved of foreign exchange, Tehran was keen for New Delhi to provide the funds needed to expand the port.

India, in turn, was concerned about spending in Iran through Indian banks as this would expose them to US sanctions. India also wanted Iran to establish connectivity of the port with Bandar Anzali at the mouth of the Caspian Sea so that the proposed International North-South Transit Corridor (INSTC) linking Russia with South Asia and beyond could become operational.

Chabahar's strategic significance

However, as IMEC has demonstrated, Iran does not have many steady partners in the global league. As it tries to gain a foothold in entities like the Shanghai Cooperation Organisation and BRICS, not just India but other Asian nations have also questioned Iran’s commitment to bilateral deals.

By signalling its commitment to Chabahar, Iran hopes to demonstrate otherwise. However, there are Indian seafarers held hostage in Iran even now. Only if Tehran doubles down on its commitment to Chabahar would nations like India risk taking on US sanctions to develop investments in Iran.

The current US waiver to New Delhi for Chabahar notes: “As Indian entities and partners proceed with the construction and development projects for Chabahar Port, it will be critical that any entities with which the Indian companies and entities engage do not have direct or indirect ties to IRGC (Iranian Revolutionary Guards Corps)."

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It is akin to saying do not get involved with PLA-related outfits in China. Also, the waiver states any trade in metals or software with any Iranian company or the Iranian Central Bank is not acceptable.

The US has responded to the signing of the long-term India-Iran deal on Chabahar by warning that the pact will have to contend with the existing sanctions regime, even though under a 2018 policy Washington specifically exempted India for the development of the port.

This threat of sanctions has crippled the expansion of the port by preventing the addition of gantries and other necessary infrastructure, as European manufacturers have been skittish in responding to Indian tenders.

Yet, every year since 2020, India has signalled that the role of Chabahar, where India runs two terminals—a container and a multimodal one—should expand.

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There is economic potential too. 

Freight rates to Russia via the Suez Canal before the Covid-induced dislocation averaged $650 per container and had risen to over $4,000. While it has come off those highs since then, the prospect for an alternative route has been rising.

There are challenges, of course.

INSTC’s business viability is hampered by the current low volume of trade India does with Central Asia. In 2020, India’s trade with the entire region, including Russia, was just $16.1 billion, only 2% of India’s total annual trade volume.

The more immediate reason for investing in the port is that it is a test case for India’s understanding and promotion of its geo-strategic interests in the Indian Ocean. India has realized it cannot stay aloof from these issues. Recently, our naval frigates have begun patrolling Indian vessels in the ocean in coordination with other navies to safeguard them from pirates and state-supported actors like the Houthis.

This means a nuanced understanding of the needs of neighbours and planning a port-plus strategy. 

The rapid development of Gwadar in Pakistan by China means there is no way India can afford to step back from its commitment to develop Chabahar, which New Delhi describes as the “country's first overseas port project with strategic objectives."

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