The US ambassador to the UN, Nikki Haley, during her visit to New Delhi, called on India to “rethink its relationship with Iran". Haley’s statement is a logical consequence of US President Donald Trump’s declaration, in early May, that the US would no longer be part of the Iran nuclear deal. In addition to reimposing economic sanctions, Trump has warned that anyone doing business with Iran risks severe consequences. This implies that any entity, including Indian, doing business with Iran can also be subjected to economic sanctions in the near future.

These developments have generated a sense of déjà vu in New Delhi’s foreign policy community. There were some conversations along predictable lines as to whether India would stand up or give in to US pressure. However, it should be noted that it is not just the US—other Gulf countries are also keen that India should scale down its economic engagement with Iran. India now has to carefully balance its interests in Shia-dominant Iran with its interests in Sunni-dominant Gulf countries such as Saudi Arabia and the UAE.

From an Indian perspective, Iran, in addition to its energy resources, is critical for operationalizing connectivity projects with Afghanistan. On the other hand, Saudi Arabia and the UAE host about six million overseas Indians and account for an estimated 36% of total remittances to India. Remittances from Iran to India are negligible.

While the US has been piling up diplomatic pressure, its allies, such as Saudi Arabia and the UAE, are enticing India with the promise of greater investments. In the recent past, Abu Dhabi National Oil Company (Adnoc) and Saudi Arabian Oil Company (Saudi Aramco) have promised to invest $44 billion, amounting to a 50% stake, in Ratnagiri Refinery and Petrochemicals Ltd (RRPCL). Representatives of Adnoc and Saudi Aramco have hinted at the possibility of greater investments in India.

Additionally, India needs to factor in the China angle. There is a concern that owing to the current economic sanctions, Iran is moving increasingly towards China. Even in the absence of punitive sanctions, Iran would seek to strengthen its relations with other powers because of the hostility that defines its relationship with the US. Immediately after the economic sanctions were lifted in 2016, Iran started scaling up its three-pronged strategy of improving defence relations with Russia, working on infrastructure projects with China and adopting the euro in its external economic engagement.

As per the 2015 nuclear deal, till October 2020, every defence purchase of Iran has to be approved by the UN security council. Iran has evinced an interest in purchasing approximately $10 billion worth of military hardware from Russia after 2020. Iran is collaborating with China on infrastructure development projects such as strengthening the Tehran Metro rail project and the operationalization of cargo trains between the two countries. Prior to the nuclear deal, Iran was selling oil in many currencies, including the Chinese renminbi (RMB) and the Indian rupee. After the deal, to blunt the sharp edges of a possible US punitive measure in future, Iran insisted that payments for oil purchases be made in euros instead of dollars.

Meanwhile, Saudi Arabia was extremely unhappy with the nuclear deal. The Saudis opined that an unfettered Iran would emerge as a regional hegemon. Therefore, for many in Saudi Arabia, the 2015 Iran nuclear deal amounted to a dilution of security guarantees given by the US for selling oil in dollars instead of in other currencies. To compound Saudi anxiety, the progress of US shale gas production indicated its possible disengagement in the near future.

It is in this evolving geopolitical context that, in August 2017, Saudi Arabia’s then vice-minister of economy and planning, Mohammed al-Tuwaijri, referring to external borrowings, said that they “will be very willing to consider funding in renminbi and other Chinese products".

Subsequently, China made an unsuccessful offer to directly purchase a 5% stake in Saudi Aramco. A stake in Saudi Aramco would have added significant impetus to Beijing’s efforts to further internationalize its currency. China had already reached agreements with Russia to make oil payments in RMB. For China, which accounted for 11.5% of the total global merchandise trade in 2017, greater international use of RMB is not only convenient, but also a strategic necessity. If big oil-producing countries, such as Saudi Arabia, accept RMB payments for energy sales, then the RMB will emerge as a strong international reserve currency. However, renewed sanctions on Iran have repaired the relationship between Saudi Arabia and the US. For the moment, Riyadh’s movement towards Beijing seems to have slowed down and the possibility of a petro-yuan/RMB has been pushed a little further into the future.

Given this backdrop, India needs to count in two critical variables in crafting its response to the evolving security dynamics in the Gulf: first, the larger presence of the diaspora and the considerable remittances from countries such as Saudi Arabia and the UAE; and second, Chinese efforts to facilitate the rise of petro-yuan/RMB to internationalize its currency. Therefore, framing the debate on the Iran issue in terms of “standing up or yielding to the US" is not a prudent way forward.

Sanjay Pulipaka is a senior fellow at the Nehru Memorial Museum and Library, New Delhi.

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