In today's Finshots, we talk about India's deal with Iran to develop the Chabahar port.

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The Story

On Monday, India signed a historic agreement with Iran to develop the Chabahar port. But here's the thing... they had signed a formal agreement to do the same thing way back in 2016. So why is this news? And what on earth is Chabahar port?

Well, before we answer that question... a minor detour.

Imagine you’re an Indian trader seeking access to the untold riches of Central Asia. Uranium from Kazakhstan. Gold and rare earth metals from Uzbekistan and natural gas from Turkmenistan. If you were so bold to make the arduous journey, you could engage with these countries and forge a partnership — for trade. You could also send them some of your wares in the process — tea, coffee, spices, textiles and even pharmaceuticals. If it works well, you could look beyond Central Asia and even reach Russia.

Unfortunately, there’s a problem. Most of these countries are landlocked with no access to ports. So if you’re planning on establishing a trading route, you have limited options. One option you could consider is China. India shares a border with China. China in turn shares a border with Russia, Mongolia, Kazakhstan and other countries in Central Asia. If you have a trading route established here, you could make this work.

Unfortunately, while this idea sounds great on paper, there are a few practical difficulties. India and China don’t have many trading posts set up along the border. In fact, there are only three. One of the most popular trading posts is the Nathu La Pass — connecting India and Tibet through the Himalayas. If you plan on taking this route, may god be with you. The rugged Himalayan roads don’t work well for most cargo and any border dispute with China could effectively force you to suspend all trade for the foreseeable future. In fact, this route was closed between 1961 and 2006 precisely for this reason.

Also relying on China to facilitate any kind of trade is a terrible proposition to begin with. It gives our neighbour economic and diplomatic leverage and that’s not a smart thing to do. This is why we will also have to rule out any shipping routes that involve China.

China will not work.

This leaves us with one other option—a slightly more practical route that involves Iran. And here’s how it works. First, you ship your goods to Iranian ports through the sea. And then use the road or rail network to reach Afghanistan. From here on in, you make the onward journey to Central Asia and until about a decade ago, you did all this through an Iranian port called Bandar Abbas.

The port is still operational by the way. But it does have a few problems. For starters it’s located along the southern coast of Iran. This may not mean much to you. However, the geographical positioning means that any goods shipped to Central Asia from Bandar Abbas must travel a greater distance through challenging terrain to make it to the destination. This increases transit time, and costs and could lead to potential delays if there’s a breakdown somewhere along the way.

Also, Bandar Abbas is located in the Strait of Hormuz — a strategically critical and geopolitically sensitive waterway, facilitating approximately 20% of the world’s petroleum trade. It is a hotspot for military confrontations. The US even went to war in the Strait of Hormuz back in 1988. So yeah, it’s not a particularly enticing route.

But that doesn’t mean we are out of options yet. If you have an iron will, you can forge a path yourself. And that’s what we have been trying to do with the Chabahar port. It solves most of our problems. It’s not located in the Strait of Hormuz i.e. the Persian Gulf. So we can avoid the geopolitical flashpoints entirely. Instead, it’s located in the southeastern region of Iran with direct access to the Indian Ocean. This is a faster shipping route and with proper rail and road links, you can also cut down on transit time on land.

Granted, you still have to navigate through Afghanistan and that’s not exactly a friendly route. But on the flipside you can bypass Pakistan entirely. So from a strategic point of view, Chabahar port could be a true game-changer.

This is why India signed a formal agreement with Iran to develop Chabahar port with an initial commitment of $85 million and a $150 million credit line. They’ve also planned to invest in the road and rail network that will eventually go on to connect Chabahar to Central Asia and through it, all of Russia.

But there’s been one final roadblock. Despite signing the agreement in 2016, things haven’t taken off in a massive way. You could attribute part of it to the US sanctions on Iran. While there is no specific sanction on the port itself, the uncertainty surrounding the matter didn’t help. The bigger problem however was the fact that India and Iran could not fully agree on a few things when it came to the Chabahar port. There were niggling issues with things like arbitration clauses and other legal frameworks and as a consequence, they’d often renew the partnership each year on a short-term basis.

This created even more uncertainty.

For instance, shipping companies plan their routes and logistics months in advance. They sign contracts and fix rates based on the certainty of these routes. They also have to make significant investments in port infrastructure tailored to their specific needs. And they have to navigate local laws, customs regulations, and administrative practices. Imagine they do all this and then one day find out India and Iran have abandoned their plans to fully develop the route.

That could be catastrophic, and this explains why investors and shipping companies haven’t been too keen to invest in Chabahar.

Thankfully though, the Indian government has been privy to this little detail and after months of negotiation, India and Iran have finally signed a 10-year contract to operate the port, putting an end to some of the uncertainties at least. This should get more stakeholders interested and it should pave the way for broader cooperation between the two countries. That's why the news made headlines once again.

The only challenge?

Considering we also noted that the US continues to threaten sanctions on any country engaging with Iran, we will have to see if port operations at Chabahar will take off massively anytime soon.

Until then…

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