At this year’s G20 summit, held in New Delhi last month, leaders of several states—including European governments, India, Saudi Arabia, the US, and the United Arab Emirates (UAE)—signed a memorandum of understanding (MOU) on an initiative to connect India to Europe via West Asia. Dubbed the “India-Europe-Middle East Corridor” (IMEC), the route is viewed by some observers as a rival to China’s 'Belt and Road Initiative', and as a means to isolate Iran.

India will embark on this new trade route despite having committed to several major transit projects with Iran: namely, the International North-South Transport Corridor (INSTC), and development of the southeastern Iranian Chabahar Port.

Amwaj.media spoke to Indian and Iranian government officials to understand how delays to the INSTC and Chabahar Port projects may have influenced New Delhi to pursue the IMEC.

Indian frustration with slow pace of development

Economic and trade relations between India and Iran date back millennia. Among the various geopolitical factors that have influenced such ties more recently are India’s rivalry with Pakistan and close cooperation with Israel, and Iran’s borders with Afghanistan and Pakistan.

India and Iran are currently both engaged in two mega transit projects in Asia: the INSTC, and development of Chabahar Port. Neither of the initiatives are going as smoothly as either state would have hoped.

The INSTC was conceptualized in 2002, with India, Iran, and Russia being the major regional powerhouses involved in the project. The endeavor was originally meant to shorten the route between India and Europe. However, in the aftermath of the major disruption to Europe-Russia trade over Moscow’s Feb. 2022 invasion of Ukraine, the project has gained renewed impetus as it helps insulate both Iran and Russia from western sanctions. It also benefits Russia greatly through reducing its reliance on transit through Central Asia.

Yet progress on the INSTC has lagged. A senior Indian official, speaking to Amwaj.media on condition of anonymity, said “we have tried for a long time to convince Iran to move forward on both the INSTC and Chabahar Port projects, but it was only after the Ukraine conflict began that Iran came to realize the importance of these connectivity projects.” The source also expressed the belief that Iran had until recently underestimated its unique geostrategic position, and for that reason had made only very slow progress in helping make the INSTC fully operational.

A combination of apparent mismanagement and alleged negligence in Tehran is also claimed to have upset the authorities in New Delhi. According to another senior Indian official who spoke to Amwaj.media on condition of anonymity, India has reportedly brought in 85M USD worth of investment, as well as a roughly 160-170M USD credit line to develop the Chabahar Port. Yet a large portion of this money has allegedly gone missing.

“What they say about the amount of investment is true, but our official position has been to deny this and say they have brought in a significantly lower amount, because some of the money they brought into Iran has disappeared,” a senior Iranian diplomat familiar with the matter charged. However, no investigation appears to have been initiated on the part of Iranian authorities. Amwaj.media was unable to independently verify the claim about the allegedly missing money.

India pivots to US allies for trade route to Europe

There are signs that India’s interest in existing projects with Iran may be waning. New Delhi has turned its attention to the IMEC, which is a trade route proposed by the United States. Governments involved in this project—including India, Israel, and Saudi Arabia—have a combined GDP of 47T USD. European Commission President Ursula von der Leyen has claimed that the route would be up to 40% quicker than existing transport networks connecting Asia and Europe.

Yet not everyone is convinced that the IMEC has a sustainable future. Some observers have charged that the IMEC “has no raison d’etre” and “will remain hostage to the American and Israeli shenanigans in the Persian Gulf.” Taking into account the decades-long enmity between Iran and Israel, and the fact that the IMEC would connect India and West Asia to the Israeli port of Haifa, the route certainly raises questions in Tehran.

India-Iran ties have already been tested by India’s relationship with Israel. New Delhi is a member of the I2U2 Group, an economic group that includes among other states Israel, the UAE, and the US. India has tried to reassure Iran that this partnership with Tel Aviv is purely economic. In this vein, a senior Indian diplomat told Amwaj.media that “I2U2 objectives are economically-oriented—the idea is that certain US and Israeli technologies can be deployed, using UAE capital, in India for food security and clean energy.” However, Israel’s ambassador to India paints a different picture of I2U2, arguing that the group was founded partly due to shared “fear of Iran.”

There are other reasons why the IMEC has the potential to cause friction between India and Iran. New Delhi is not sufficiently resourced to participate in three major transit projects on the scale of the IMEC, the INSTC, and the Chabahar Port development. The fact that the Islamic Republic is still heavily sanctioned also makes trading with Iran more costly and time-consuming. This means India may have to choose between continuing with existing projects with Iran or pursuing a new opportunity with the IMEC.

Iran may well have sensed some discontent in India concerning the Chabahar Port project, and moved accordingly. In the Iran-China 25-Year Cooperation Program, which has been seen by Amwaj.media, Tehran agreed that Beijing would develop agreed parts of the Chabahar Port. In return, China will be able to use the port and compensate Iran accordingly.

Tehran has nevertheless kept the door open for continued Indian involvement, proposing a long-term contract with New Delhi in Sept. 2023 to help develop the port. Earlier this year, India also announced an 80M USD investment in Chabahar Port, indicating that it still sees a future for the project. The core Indian interests behind the project, including access to Afghanistan and Central Asia, have not changed.

Future prospects

Several factors may influence India’s willingness to stick with existing projects with Iran.

Iran’s recent invitation to join the BRICS group of countries in Jan. 2024 could potentially make financial transactions between New Delhi and Tehran more seamless. In terms of financing of development projects, BRICS has its own bank—the New Development Bank (NDB).

The bloc also plans on utilizing an alternative to the Belgium-based SWIFT financial messaging service for transactions between member states. With access to the NDB and the SWIFT alternative, India and Iran could utilize a trade mechanism based on local currencies to bypass western sanctions while investing in Chabahar Port, similar to plans that were announced in Feb. 2018. Of note, the latter initiative was disrupted by the US withdrawal from the 2015 Iran nuclear deal and reimposition of all sanctions in May 2018.

On the other hand, major shifts in global trade patterns over the past year have provided the INSTC with renewed impetus. India’s trade with Russia has jumped massively since the Ukraine war began. Indian imports from Russia have seen a 400% surge in the current fiscal year, driven by purchases of discounted oil. Meanwhile, closer Iranian-Russian cooperation—including on transit—provides hope that the INSTC will serve an increasingly important geostrategic role in the region. Recently, there have notably been efforts to address the Astara-Rasht bottleneck in Iran, which would enable full rail connectivity.

Furthermore, the ongoing conflict between Israel and the Palestinian Hamas movement further complicates the region’s geopolitics, and adds greater uncertainty to the IMEC’s future. This is particularly since Saudi Arabia has reportedly paused talks on the normalization of relations with Israel.

In this context, the Chabahar Port development project and the INSTC may yet prove the more viable options for India, especially if the Israeli-Palestinian conflict continues to worsen.