Why India Is Finally Complying With Sanctions on Iran

Here are the reasons for why we're seeing such a remarkable turnaround -- and how much it actually matters.

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Iranian President Mahmoud Ahmadinejad visits the Natanz nuclear enrichment facility, 217 miles south of Tehran, on April 8, 2008. (Reuters)

Earlier this week, North Korea canceled its 1953 armistice with the South, offering a vivid and no-doubt intentional reminder of how nuclear weapons can turn localized conflicts into the subject of intense global anxiety. Luckily, events from late last week made a Middle Eastern repeat of the Korean peninsula's ongoing nuclear nightmare slightly less likely. And considering the stakes involved -- stability in the Middle East and the survival of the global nuclear nonproliferation regime, for starters -- even a slight decrease in its likelihood is welcome news.

The sanctions have created conditions under which even the most resistant countries have no option but to fall in line.

A week ago, Reuters reported that one of India's biggest state-owned oil refineries, and the country's largest single purchaser of Iranian oil, is dramatically cutting back on its imports thanks to the now total lack of companies now willing to insure Iranian oil shipments. The refinery purchased five million metric tons of Iranian oil last year, meaning that a third of India's projected oil trade with Iran is now in jeopardy. U.S. and EU sanctions have narrowed the space for commerce with the Islamic Republic to the point where even one of the most reluctant participants in the sanctions regime has no choice but to continue scaling down its oil purchases. "As sanctions tighten, the room to maneuver for Iran and its trading partners continues to shrink," explains Trevor Houser, an expert on energy-related issued for the Rhodium Group, in discussing the latest Indian reductions. "The number of workarounds and loopholes that you can exploit gets smaller and smaller, and you have a growing number of unintended consequences like this."

Indeed, these reductions have nothing to do with any sanctions that specifically deal with India. Quite the opposite; in fact, India was one of a handful of countries that received a waiver under U.S. sanctions law. It simply has to show a "significant reduction" in Iranian oil imports in order to be in compliance with the sanctions regime, a subjective standard with no set numeric value. India's government and polity tend to resent U.S. sanctions, in any event. "They see it restraining their freedom of action, and they feel they don't have much say in how the sanctions are imposed," says Tanvi Madan, director of the Brookings Institution's India Project. "It's not a question of joining the sanctions regime. It's that they don't have a choice." The sanctions have created conditions under which even the most resistant countries have no option but to fall in line.

In India's case, this has produced a remarkable turnabout. Just a year ago, India was actually increasing its purchases of Iranian oil; last year, the two countries swapped trade delegations just months after an Iranian terrorist attack on an Israeli diplomat in Delhi. Iranian oil helped quench India's burgeoning energy needs, while the countries' partnership provided India with an easy route into Afghanistan, a critical front in its long-running cold war with neighboring Pakistan. Even so, Indian purchases of Iranian oil have declined 22 percent since March of 2012 -- and that was before last week's news.

India might even have self-interested reasons for complying with the sanctions. Madan emphasizes that India has no desire to see Iran go nuclear. She says that India, which has perhaps the third-largest population of Shi'ite Muslims on earth, fears potential spillover from sectarian tension in the Middle East, as well as the domino-effect like spread of nuclear weapons in the region. On a more quotidian level, the sanctions eliminate other potential buyers of Iranian oil, allowing India to bargain for better deals. "The Indian government is trying to use this as leverage with the Iranians," says Madan. "Next year they can say, we're going to reduce imports by 10 percent unless Iran reduces oil prices."

U.S. sanctions that went into effect on February 6 also make it nearly impossible for Iran to repatriate foreign currency. India currently buys Iranian oil by paying into an in-country escrow account managed by the Iranian government. India's oil purchases now act as a kind of domestic stimulus: India used to pay for oil in dollars that would end up in Iran. Now it pays in rupees that can only be spent in India, on Indian products.

Madan says that the Indian government isn't fond of this arrangement, due to an understandable wariness of letting any foreign government hold large, rupee-denominated bank accounts in India. Even so, Houser pointed out that the February 6 sanctions could actually benefit India: "It forces large quantities of what used to be dollar denominated trade into local currency barter arrangements," a situation he likened to "being told you can only do your shopping at Walmart." India has more to gain from going along with the sanctions regime than it does from bucking a nearly worldwide consensus on the importance of stanching the spread of nuclear weapons. Even for the most reluctant adherents to the sanctions regime, cooperation is simply a better option than recalcitrance.

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Armin Rosen is a former writer and producer for The Atlantic's Global channel.

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