As US wrecks Iran deal, India's Chabahar trade route to Russia at stake

A multination trade route being developed by India to halve shipment time for container cargo to Russia, Central Asia, and Afghanistan could be among the casualties of US President Donald Trump’s decision to end the earlier nuclear agreement with Iran.

After Tuesday’s decision by Trump to reinstate sanctions against the Iranian government, India might have to deal with a bloated import bill as global crude oil prices soar, while the budding trade opportunities between India and Iran in non-oil goods have been cut short.

Experts say we have even more to lose. The ambitious proposal for a new trade route, the International North South Transport Corridor (INSTC), might have hit yet another block. 

India’s current trade with Iran takes place mostly through the choked Bandar Abbas port; it handles about 85 per cent of that country’s seaborne traffic. Delhi is betting highly on upgradation of the Chabahar port in southern Iran. This deep-sea port, having the capability of handling high tonnage vessels, is being developed by India to be the future starting point of INSTC. The latter envisages road and rail connectivity to the European markets of Russia, as well as future connections to the Central Asian nations of the Commonwealth of Independent States (CIS). 

A little more than three years after the first successful dry run took place, the first shipment to Russia was sent in April last year to mark the 70th anniversary of diplomatic and trade ties with India. While business through the new route has remained slim, it is expected to now be even more so.

“Reinstating of sanctions is expected to reduce opportunities for private financing and investments in the port and along the route, which has become the cornerstone of our trade policy for the region,” a senior commerce ministry official said.

Hurdles higher

Data from the Directorate General of Foreign Trade shows almost all of India’s container trade with Russia still passing through the Suez Canal, moving around the European continent and through St Petersburg.

The Federation of Freight Forwarders’ Associations in India (FFFAI) had conducted the first dry run through Azerbaijan in 2014. It had initially estimated six months as the time required to popularise the new route after it opened. However, difficulties remain over the lack of loan facilities from banks on this route, inadequate insurance coverage for bills of lading, non-vessel operating common carriers and irregular shipping services to Iran.

“The average time taken is brought down from the current 35-40 days to 20-22 days, while logistics costs will go down by 44 per cent, but the lack of banking channels remains a challenge. Apart from IndusInd Bank, no other player is providing banking services, while the lack of insurers also remains,” says Shankar Shinde, executive committee member at the FFFAI.

A 165-km rail link between Rasht in Iran and Astara in Azerbaijan is nearing completion and shipments can use alternative roads as of now, he added.

Exporters had difficulties with paperwork on the Iranian side but this has eased, said Ajay Sahai, director-general of the Federation of Indian Export Organisations. However, insurance of export shipments remains a problem.

New markets

From Chabahar, rail, road, and ship linkages are being built to connect with those already in place, connecting Bandar Abbas to the Russian port of Astrakhan, 3,200 km away. Shipments from Nhava Sheva in Mumbai proceed to Bandar Abbas and from there fork out on one of two routes. The first traverses through Tehran and crosses the Caspian Sea to Astrakhan. The other leads to Baku in Azerbaijan, from where it goes north to Russia by land or sea. 

In February, India also acceded to the Ashgabat agreement, allowing Delhi to take advantage of rail connectivity in Central Asia and utilise the Iran-Turkmenistan-Kazakhstan railway line. India’s trade with the CIS nations reached $12.8 billion in the first 10 months of 2017-18, compared to nearly $11.2 billion in 2016-17. Major exports to the region are pharmaceuticals, machinery, coffee, tea, and spices. These are considered to be underserved markets and potential suppliers of energy and minerals to India.

The corridor is also crucial for India’s plan of securing a route to war-torn Afghanistan that doesn’t have to cross neighbouring Pakistan. Last November, a consignment of 15,000 tonnes of Indian wheat reached the country through the route. The work on the Afghan side of a rail link between Khaf in northeast Iran and Herat in Afghanistan, begun two years earlier, is also stalled.

THE STORY SO FAR

2000: Initial talks on the new INSTC route started

2003: India, Russia, Iran sign initial agreement to developed INSTC

2014: A successful dry run was conducted through Iran, Azerbaijan, and Russia in 2014

2016: India signed a deal with Iran entailing $8 billion investment in Chabahar port

2017: First transshipment reached Russia from India - 70th years of diplomatic relations between both nations

Mid-year 2018: Most multi-modal routes of INSTC to be operational

December 2018: Shipping ministry expects the port to be operational by December 2018


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel