On May 13, India signed a 10-year agreement with Iran to develop and operate the Shahid Beheshti terminal of Iran’s strategic Chabahar port. The new agreement follows a previously promised Indian investment in 2016 of a potential $500 million. It comes after multiple failures to fully implement a previous deal concluded in May 2016 to develop two terminals and five berths at Chabahar port to transport goods and gas from Central Asia to India and handle other international cargo.
Indian Prime Minister Narendra Modi traveled to Iran in 2016 to conclude the original Chabahar Agreement, also signing an international transport and transit corridor deal Tehran drafted to expand port infrastructure. But U.S.-led sanctions on Tehran forced New Delhi to backtrack on its previous commitments to develop the port. India eventually managed to negotiate an agreement with the United States to allow Indian investments in the port. Burdened by its banking and financial challenges, however, Iran delayed talks on a final package deal that was to include the initial release of $235 million by India for the Chabahar port project.
In 2018, Washington agreed to issue sanctions exemptions to enable India to use Chabahar to trade with land-locked Afghanistan for humanitarian purposes. But progress in developing Chabahar continued to be delayed by sanctions, despite regular negotiations between India and Iran, as well as warnings from Iran that it might seek Chinese investments. Iran insisted that India should sign on to a new deal, mindful that only 30% of the port capacity was being utilized. But Iran lacked the required infrastructure to connect the port to its existing – but old – network of railway and road transportation systems, and it faced occasional security threats from terrorist groups around the port.
By March 2023, Tehran called on India to use Chabahar port for mutually beneficial trade, including Indian imports of Iranian oil, which New Delhi suspended after the United States declined to extend sanctions waivers. But slow progress in deliverables by Iran and unresolved disagreements over amendments to a long-term deal delayed the Chabahar project.
The latest agreement in May, signed by Indian Ports Global Ltd. and Iran’s Port and Maritime Organization, came after Modi met with the late Iranian President Ebrahim Raisi on the sidelines of a BRICS summit in South Africa in August 2023. The long-term deal is narrowly focused on expanding the Shahid Beheshti terminal, with a $120 million investment from Indian Ports Global and a credit window of $250 million, thereby enabling New Delhi to avoid financially overcommitting to the project. Following the signing of the agreement, the United States suggested India could face sanctions for business deals with Iran.
India might be buying time with Iran to gauge how fast the Chabahar port project advances with this initial investment. Located in southeastern Iran on the shores of the Sea of Oman alongside the Shahid Kalantari Port terminal, the Shahid Beheshti terminal operates within the Chabahar Free Trade-Industrial Zone, intended to incentivize cargo ships to dock and unload goods at Chabahar. But despite Iranian efforts to attract commerce, the trade zone faces serious competition from Dubai’s internationally recognized Jebel Ali port and free zone.
Still, the Chabahar port’s location in deep Gulf waters is likely to attract high volumes of trade to feed into the International North-South Transport Corridor, a vast network of ship, rail, and road routes for moving cargo between India, Iran, Azerbaijan, Russia, Central Asia, and Europe. Chabahar is also just over 100 miles away from Pakistan’s Gwadar Sea Port, the terminus of the China-Pakistan Economic Corridor, which has drawn $50 billion in Chinese investments but has had mixed success due to sluggish business resulting from mounting economic, political, and security challenges in Pakistan, including relative instability in the area surrounding the port. Therefore, India has its eyes set on using Chabahar to gain a competitive trade advantage over its rivals, Pakistan and China.
Tehran also has plans to connect Chabahar to a vast national railway system for faster links to the International North-South Transport Corridor and the Kyrgyzstan-Tajikistan-Afghanistan-Iran trade corridor. But Iran’s incredibly expensive, multiphased railway project, which also includes maritime infrastructure development, has already faced delays since construction started in 2020. The Kyrgyzstan-Tajikistan-Afghanistan-Iran trade corridor project, implemented by the Economic Cooperation Organization, also needs action plans in cooperation with international organizations to come to fruition.
Additionally, Armenian authorities are offering to transfer Indian goods through the proposed Iran-Armenia-Georgia-Black Sea corridor. This would make Chabahar a vital trade hub that could support trade by sea, rail, and road along a 4,470-mile corridor. This plan, first conceived by Russia in 2000, would potentially include trade with Russia, India, Iran, Turkey, Azerbaijan, Belarus, Bulgaria, Armenia, Ukraine, Oman, and several Central Asian republics. If completed, the corridor would also connect to the Trans-Caspian International Transport Route, which connects China to the European Union.
Meanwhile, India’s trade with Russia soared to nearly $50 billion in 2022-23, which, along with Iranian projects to link Chabahar to its railway system, points to grander Asian ambitions to seek alternative regional and international trade routes, especially given the need to bypass war-torn Ukraine for the time being. Some Iranian reports even overoptimistically suggest that if these plans are realized, Chabahar could potentially rival the Suez Canal in attracting global trade.
If U.S. sanctions and regional conflicts do not disrupt the project, a regionwide corridor with Chabahar at the center could offer alternative international trade routes on India’s doorstep, with Russia and Iran on board. The Chabahar corridor could also reduce transportation time by 40%, especially for goods heading to Europe, and cost less than transfers via the conflict-ridden Red Sea and the commercially overcrowded Suez Canal, enabling the potential flourishing of a $5 trillion economy for India through the Iranian port.
These developments could turn the Chabahar trade corridor, including the Shahid Beheshti Port terminal, which accounted for only 2.5% of all port activity in Iran less than two years ago, into a global hub by 2030, creating flexible production chains, enhancing regional integration, introducing variety in products across Asia, and enabling India to reach a higher export potential as one of the largest economies in Asia.
This could also encourage the Gulf Arab states already trading in the billions with India, including the United Arab Emirates and Saudi Arabia, to explore the Chabahar corridor, mindful of the quick transit routes it provides to the rest of Asia. While U.S.-led sanctions on Iran could delay some of these plans, joint memberships in the BRICS grouping and the Shanghai Cooperation Organization could encourage Iran and its Arab neighbors to explore new trade routes with Asian powers such as India, Russia, and China.
India is mindful of this vast potential, and Iran is working to secure a $1 billion investment from India to develop Chabahar. It is uncertain if a larger Indian investment is forthcoming, and Iranian officials stress the need to use local contractors to develop the port’s infrastructure, which causes friction with New Delhi over the division of tasks and funding for them. By some estimates, Iran will need almost $9 billion more in investments to develop its southern Gulf shores to levels required to attract international trade.
Mindful of the potential risk of U.S. sanctions hindering the port project once again, both India and Iran expect to face challenges if they are to build Chabahar to its fullest potential. Not surprisingly, Iranian policy experts are voicing concern about the limited funds that India has allocated for Chabahar, claiming that Iran will develop the port with or without India – without offering details about how Tehran could find cash to fund this massive project. Tehran, meanwhile, has few alternatives to circumvent the sanctions regime. The bigger question for Iran is how far India, whose authorities once referred to Chabahar as a gateway to golden opportunities, will go to resist U.S. sanctions to advance the project. If past is prologue, India is likely to proceed with significant caution in implementing this ambitious deal, to avoid sanctions problems with the United States.
