Changing Dynamics of India–Central Asia Ties

Changing Dynamics of India–Central Asia Ties

Introduction

The geopolitical salience of Central Asia for India was never in doubt. Most Indian policymakers and analysts consider the region important because of its strategic location, cultural and civilizational linkages with India, energy resources, and trade opportunities, among other factors. Focusing on the region’s location, oil and gas reserves, and competition for pipeline routes, many analysts advanced the narrative of a new “Great Game” in the 1990s, akin to the international struggle for supremacy in Central Asia in the nineteenth century. With time, competition for military bases in the region as well as regime change through color revolutions added another dimension to this rivalry.

Despite its rhetoric and sometime intentions, however, India itself was never really part of any competition for regional influence. Some scholars accused India of indulging in wishful thinking toward the region rather than develop a coherent strategy. With no direct road transportation access and difficult market conditions, Central Asia has not attracted many private Indian companies, and its economic significance for India declined considerably in the 1990s. Politically, Indian officials were more or less comfortable dealing with the region’s authoritarian leaders, who were part of the former Soviet elite and with whom New Delhi had worked for decades. They also appeared to provide stability and were committed to fighting Islamist extremism and terrorism. Unlike the United States, Europe, and many multilateral organizations seeking to spread democracy and free-market economics to the region, India has focused primarily on ensuring political stability there, viewing any turbulence as a serious threat. India obviously would have welcomed a more democratic Central Asia, but it preferred to allow democratization to happen at its own pace.

New Delhi also remained convinced that Russia would remain a predominant political and economic force in the region, and generally pursued cooperation with Moscow on the ground. Although many in India still believe that Russia will retain its influence into the future, many scholars have also started considering another possibility—namely, that the dominant role might eventually pass to China, which recently has become increasingly friendly toward Russia. As Beijing increases its engagement in the region and creates a larger profile through trade, energy deals, military agreements, the Shanghai Cooperation Organization (SCO), and now the One Belt One Road (OBOR) project, New Delhi is watching carefully. Despite many positive developments and fruitful diplomatic engagements, India is still very cautious in matters relating to China. Both countries are still very mindful of basic balance of power considerations even if both officially deny this proposition.

Persistent uncertainty in Afghanistan, particularly in the context of the difficult India-Pakistan relations, has added a new dimension to India’s Central Asian strategy. Whereas the failure of the international project to stabilize Afghanistan poses common security challenges, a positive outcome would open tremendous economic opportunities to both India and Central Asia. On the whole, both the China and the Afghanistan factors have increased the strategic significance of Central Asia for India. The U.S. drawdown in Afghanistan has further pushed Indian policymakers to look for new options.

Evolving Indian engagements with the region

Efforts to develop political, economic, and energy partnerships have dominated India’s “extended neighborhood” policy in the post-Soviet period. Today New Delhi’s approach to the region is laid out in its twelve-point Connect Central Asia initiative, announced in 2012, which seeks to strengthen political, security, economic, and cultural connections. This policy pursues several broad objectives: (1) engaging with the region as a whole in a much more proactive manner; (2) strengthening security and defense dialogues, particularly in the context of U.S. drawdown in Afghanistan and declining interest in Central Asia; (3) pursuing cooperative engagements, both bilateral and collective, with Russia, China, and Iran in order to safeguard Indian interests; and (4) enlarging India’s development cooperation footprint in the region. In the meantime, India has signed strategic partnership agreements with Kazakhstan (2009), Uzbekistan (2011), Afghanistan (2011), and Tajikistan (2012). It also has a longstanding “special and privileged” partnership with Russia and has elevated its relations with Mongolia to a “comprehensive partnership” in 2015.

The fact that Central Asia’s perceived strategic significance for India is growing was made clear by Prime Minister Narendra Modi’s eight-day visit there in July 2015. He covered all five Central Asian countries on his tour—the first time any Indian prime minister did so in one trip since they gained independence in 1991. The visit also provided a new strategic direction for the Connect Central Asia policy.

Moreover, India (along with Pakistan) will soon be joining the SCO. It was impelled to seek membership by the confusion and uncertainty surrounding the U.S. drawdown in Afghanistan. China seems likely to use the organization to stabilize Afghanistan in the near future, and for India coming on board is a wise move. Besides, New Delhi has always been positive about the potential for economic, energy, and transport projects growing out of the SCO.

In parallel, India is exploring the possibility of a free trade agreement with the Eurasian Economic Union (EAEU), and a special joint group appointed to study its feasibility has already submitted its report. It is expected that formal trade negotiations with the EAEU will start soon.

New Delhi’s growing attention to the region is thus in no small part a response to the changing dynamics of the major powers’ relations with Central Asia. Increased Chinese investment and diplomatic engagement, Russia’s economic downturn and the resulting decline in remittances to Central Asia, and the reduced U.S. military focus on Afghanistan have all pushed India to pay more attention.

Particularly important in this context is the increased involvement of China, a country India still regards as a competitor. In 2013, Chinese President Xi Jinping made a ten-day visit to four Central Asian states and signed an estimated $48 billion worth of investment and loan agreements covering energy, trade, and infrastructure. This investment is designed to create a platform for China’s ambitious OBOR initiative that will link Asia and Africa with Europe through a network of six transportation corridors—a project that could fundamentally reshape the geoeconomics and geopolitics of Eurasia as a whole.

Both China and Russia have expressed interest in future integration between the EAEU and the OBOR. If it does take place, many in Central Asia might pursue enhanced strategic and economic engagement with India. This goal would fit well with the multi-vector foreign policies of most Central Asian states, which seek to balance their dependence on Russia and China through stronger relations with other powers. Moreover, India is seen as a benign power that does not pose any political, economic, or strategic threats to the countries in the region.

Over the past fifteen years, Central Asia’s trade and investment links with neighboring economic centers have increased significantly. So far its main export destinations and sources of imports, FDI, and remittances have been China, Russia, and the European Union. Now that these economies are either stagnating or slowing down, however, India could emerge as an attractive new market.

Another important strategic consideration is Afghanistan, a country whose stability India considers vital for regional security and crucial for its Central Asian ties. In fact, the country’s significance for India goes far beyond a mere complicating factor in its already difficult relations with Pakistan. In the past decade and a half, New Delhi has provided $2 billion worth of assistance to Kabul, mostly focused on economic development. Underpinning this assistance were many strategic objectives, including in the areas of politics (gaining influence through large projects and capacity building) and economics (preparing a strategy for South-Central Asia economic linkages). On the diplomatic front, India recognized that engaging with Afghanistan would garner it greater regional and global standing. Further, when it comes to potential land routes to Central Asia, both of India’s options—via Iran or Pakistan—would require passage through Afghan territory. (It’s particularly important if India is to bypass the second.) Finally, there is the humanitarian objective of providing relief to vulnerable Afghan citizens. These goals enjoy public support, and many of them have already been achieved, culminating in the 2011 signing of the bilateral strategic partnership.

Altogether, compared to many western countries, India does not have any exit strategy for Afghanistan. In fact, New Delhi may actually deepen its engagements based on its three key expectations—namely, that despite all the political, security, and economic challenges, the Kabul government will avoid collapse; that significant international support to Afghanistan will continue; and that there is little scope for any negotiated settlement with the Taliban in the near future. With the declining American interest in Afghanistan and Central Asia, however, New Delhi is already busy working out new alignments with Russia, Central Asian republics, and Iran.

Energy linkages

In the last ten years, energy diplomacy has become central to India’s foreign and security policy. India is serious about pursuing nuclear energy as well as diversifying its energy imports by securing suppliers beyond the Middle East. Apart from Russia, Azerbaijan and Kazakhstan could play key roles in this regard. India has invested in Russia’s Sakhalin-I oil and gas field, and the Indian state-owned company Oil and Natural Gas Corporation (ONGC) has purchased British-based Imperial Energy, whose key assets are located in Siberia. Competition in the region has been tough, however, because China has been pursuing a similar strategy. India and China may be cooperating in other areas, but when it comes to Eurasian energy, their rivalry has been fierce. This was clearly illustrated in late 2005 when China outbid India to acquire PetroKazakhstan, Kazakhstan’s third-largest oil producer, by placing a bid of $4.18 billion.

After many years of unsuccessful attempts to enter the energy sector in the region, India is now slowly moving in that direction. ONGC Videsh Limited (OVL), the division of ONGC responsible for foreign assets, has been seeking a foothold in Kazakhstan since 1995. These efforts got a boost in 2005, when OVL and the Kazakh state energy company, KazMunaiGaz, agreed to cooperate in the hydrocarbon sector. In 2011 during then-Prime Minister Manmohan Singh’s visit to Kazakhstan, a final agreement was signed for OVL to take a 25-percent stake in the Satpayev oil block, which holds estimated reserves of 1.8 billion barrels in Kazakhstan’s sector of the Caspian Sea. Drilling was launched during Modi’s 2015 visit to the area, and OVL is investing about $400 million in the project, with oil expected to flow by 2020. OVL also bought a 2.7-percent stake in the Azeri-Chirag-Guneshli oil field in Azerbaijan, along with a 2.4-percent stake in the associated Baku-Tbilisi-Ceyhan pipeline.

In 2013, however, India again suffered a setback in Kazakhstan, losing its bid to acquire a 8.4-percent stake in the North Caspian Sea Production Sharing Agreement from ConocoPhillips. It would have given India a stake in the vast Kashagan oil field in the Caspian Sea, and OVL came very close to finalizing the deal for $5 billion deal after getting approval from its partners. But the Kazakh government used its own legal rights to sell this stake to the China National Petroleum Corporation instead, for a sum reported to be between $5.2 and 5.4 billion.

Altogether, by some estimates, India has lost at least $12.5 billion of deals to China in recent years. And when the Kazakh government reportedly offered the ONGC a stake in the mid-sized Abai oil block in 2014, India rejected the deal. With the declining oil prices, the ONGC did not find the offer particularly attractive.

Another initiative, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, has seen tentative movement. Following two decades of discussion, leaders from all four countries held a groundbreaking ceremony in Mary, Turkmenistan, in December 2015. The event defied many skeptics who had long considered TAPI’s relevance limited to academic and diplomatic conferences. The project has enormous strategic potential: once completed, the pipeline could become a game changer in regional geopolitics and a force for economic integration. It would also generate significant transit revenues for Afghanistan and thereby help ease its economic difficulties.

The Central Asian gas market has been undergoing significant change, due to China’s slowdown and Russia’s declining demand. Turkmenistan currently exports gas to China, Russia, and Iran—and the latter two have lately reduced their imports. Russia in particular was mostly re-exporting Turkmen gas to Europe, and as both energy prices and European demand declined, its long-term contract with Turkmenistan became unprofitable. After efforts to re-negotiate the deal failed, Moscow has unilaterally reduced its imports. For its part, Iran, too, is likely to cut gas imports now that the lifting of international sanctions allows it to build domestic and export infrastructure. This means that China, already the largest export market for Turkmen gas, will only grow in importance, leaving some in Ashgabat worried about this overdependence and searching for alternative buyers. If TAPI becomes a reality, it will open new opportunities for Turkmenistan in South Asia.

Moreover, TAPI would likely also encourage Russia to send hydrocarbons to South Asia by pipeline. New Delhi and Moscow have already set up a working group to explore the possibility of bringing Russian energy to India either via the Afghanistan-Pakistan route or via China.

Finally, an emerging area of Indian and Central Asian cooperation is uranium purchases from the region. Kazakhstan has large reserves of uranium, and India is keen to import it for its growing nuclear industry. In 2011, Kazakhstan agreed to supply 2,100 tons of uranium to India’s nuclear plants by 2014, and it pledged an additional 5,000 tons for 2015–19 during Modi’s visit to Astana in 2015. Similarly, the state-owned Uzbek mining firm NMMC has agreed to supply 2,000 metric tons of uranium ore concentrate to India between 2014 and 2018.

Commercial possibilities

At present, India’s trade with Central Asia is rather limited. Once an appropriate framework is put in place, however, this region has the potential to alter the nature and character of India’s continental trade. If one looks just beyond Central Asia—toward a wider region encompassing Pakistan, Afghanistan, Iran, the whole of CIS, and Europe—then India’s trade is very significant, amounting to over $180 billion in 2011–12. This amount fell to about $156 billion in 2014–15 as a result of overall economic decline. But before the global economic crisis of 2008–09, India’s trade with this wider region (particularly with Afghanistan, Pakistan, and Iran) was growing very fast, promising to reach about $400 billion by today if that pace kept up. Even taking into account cyclical factors and the slowdown in exports, India could achieve a trade volume of $250 billion with this broader region within a limited time.

At present, India conducts the majority of its trade by sea. Overland India-Pakistan trade has somewhat improved in the last decade, but it remains mostly bilateral, with little re-exported to third countries. Border commerce with China ceased after the 1962 India-China war, although a limited opening has been made through the Nathula Pass in recent years. If the region’s political economy improves, and even if only about 20 percent of total trade is conducted by road, at least $50 billion of Indian trade would pass through Afghanistan and Central Asia annually within a few years. Many regional infrastructure projects currently in the plans would become economically viable as a result, which would in turn create further impetus for regional and subregional cooperation. Till now, investment in missing infrastructure links has often been impeded by politics, but Chinese and Indian investment commitments in the region as well as SCO membership for India and Pakistan may soon resolve some of these issues.

Engagement opportunities going forward

Apart from its bilateral engagements with Central Asian countries and Afghanistan, India will become increasingly enmeshed in the region through several initiatives: the International North–South Trade Corridor (INSTC), SCO, EAEU, and possibly OBOR.

During Modi’s recent visit to Iran, India agreed to invest $500 million to develop the strategically important Chabahar Port. Once build, the port will open important new transit routes—both for Indian products bound for Central Asia via Afghanistan and for Central Asian gas bound for India. The Chabahar agreement is viewed by many Indian and foreign analysts as a strategic move by New Delhi to bypass Pakistan. It may also represent an effort to counter Beijing, which is currently building the China-Pakistan Economic Corridor (CPEC) as part of its OBOR strategy. However, some key officials in Pakistan have spoken favorably about India’s engagement at Chabahar. For instance, Sartaj Aziz, the top aid to Pakistani Prime Minister Nawaz Sharif, has stated that Pakistan welcomes regional connectivity projects, noting that “there is a proposal to make Gwadar [a port in Pakistan’s Balochistan province] and Chabahar sister ports, and a road is also being built between them.” The Iranian ambassador in Pakistan also reportedly said that the agreement is not limited to India and Afghanistan, and that both China and Pakistan are welcome to join.

Although some argue that Islamabad is merely trying to underplay the importance of India’s strategic move with those statements, it is also clear that regional connectivity projects could transcend zero-sum calculations. It is possible in particular that the geoeconomics of Chabahar, CPEC, and OBOR will push policymakers to recalculate their strategies. To be economically viable and successful, all such initiatives must be linked together in the long run, and the CPEC will need access to the huge Indian market to be effective. Despite Indian concerns about the CPEC (which runs through Pakistan-occupied Kashmir), China may not view the Chabahar project negatively. More connectivity will benefit China, since it is one of the largest trading partners of almost every country in the region.

Successful implementation of the Chabahar project could bring India closer not only to Central Asian states (by reenergizing the INSTC) but also to Pakistan. India and Pakistan are preparing to join the SCO, and Iran may soon follow suit. These political and geoeconomic developments could force Pakistan to reassess its trade and transit policy toward India. Islamabad may ultimately allow Indian goods to pass through its territory not because of a change of heart but because it will sense economic gains: Indian trade volumes will play an important role in making regional infrastructure projects economically viable. To make Chabahar less attractive for New Delhi, Islamabad may also allow India to join the Afghanistan–Pakistan Transit and Trade Agreement (APTTA). Initial work is already underway on formally extending the agreement to Tajikistan, and if the APTTA comes to include Central Asian states and India, this small initial project could become a strong force for economic integration.

In the long run, it is economics rather than politics that will determine whether companies use Gwadar, Chabahar, Karachi, or some other port in China. Despite massive Chinese investment in the CPEC, Gwadar may not become attractive immediately after its completion due to the unrest in the surrounding Balochistan province. By comparison, Chabahar could be more business-friendly once it is fully built. But its success could eventually benefit Gwadar as well; taken together, two new ports connected with each other are sure to boost both their individual relevance and regional economies.

The OBOR project and the Chabahar initiative offer three major lessons. First, despite geopolitical competition, nations will become attracted to infrastructure projects linking their economies. Despite initial suspicions, many OBOR corridors may find support in India in the coming years. Second, determined political leadership and resource commitment are crucial. The Chabahar project had been under discussion for years, but it was the Modi government that has provided the necessary resources and has put full political weight behind it. Earlier, successful implementation of the Northern Distribution Network—the rail and road route across Russia, Central Asia, and the Caucasus that provided a commercial logistical corridor to ISAF forces in Afghanistan—also showed that positive results could be achieved even when negotiations involve strategic rivals. Yet another example could soon be offered by the start of the TAPI pipeline construction, at least in its Turkmenistan sector. Third, success of these projects will depend on economic integration of different parts of Asia rather than strategic ingenuity. After all, a key reason for slow implementation of the INSTC was not the lack of political commitment from Russia, Iran, or India but the still limited Indo-Russian trade. Their commerce was supposed to provide major cargo volumes for this route, and in their absence, shipping companies still prefer their original routes with established logistics. Even for Chabahar, India must have a full business plan ready because initial trade volumes to Afghanistan and Central Asia may not be enough to fully justify investments.

Due to the difficult India-Pakistan ties, Iran—with whom India shares strong historical and civilizational ties—will always be an important component of Indian strategy toward Central Asia. Next to Iran, India has the second largest population of Shia Muslims in the world. Moreover, the country has long been one of India’s top energy suppliers. Yet in the past fifteen years, this relationship has become increasingly vexed by the simultaneous growth of Indian-American ties and the escalation of U.S. animosity toward Iran. After the lifting of sanctions, however, Iran is open for business. Indian energy companies are now likely to purchase more Iranian oil, make swap deals, and invest in Iranian oil fields, where they have already made discoveries. Iran’s reemergence as a full-fledged economic player is certain to help India to expand its options in Central Asia.

The situation in Afghanistan is also unfolding rapidly. With most western forces out, Mullah Mansoor dead, and peace process in disarray, Kabul is again looking for new options beyond Pakistan. Because of OBOR and EAEU, both China and Russia want more integration in Asia. India and Pakistan will meet regularly at various SCO forums, and their own economic integration might increasingly reflect larger economic trends rather than narrow South Asian politics. This could mark the beginning of real integration among Central Asia, South Asia, and India.

Conclusion

New Delhi has long considered Central Asia a part of its extended strategic neighborhood. Building on its past linkages and goodwill, India has recently developed strong political and developmental relations in the region. The growing Chinese influence and the drawdown of U.S. forces in Afghanistan have increased Central Asia’s strategic significance for New Delhi. Due to the difficult India-Pakistan relations, Iran will continue to be an important factor for India in this context, and the lifting of sanctions against Tehran is helping India to expand its options. In a fast-changing geopolitical landscape, New Delhi is exploring the possibilities for cooperative engagements with Russia, Iran, and even China. Apart from bilateral engagements, India will also seek to engage the region through multilateral projects such as the INSTC, the SCO, and the EAEU. In the medium term, cooperation with China on OBOR is also possible, since India would also like to develop some connections to the main European markets via Eurasia.

 

Editor’s note: Gulshan Sachdeva is the Jean Monnet Chair professor and director of the Europe Area Studies Programme at the School of International Studies at Jawaharlal Nehru University in New Delhi. Previously, he headed the ADB and the Asia Foundation projects at the Afghanistan Ministry of Foreign Affairs in Kabul from 2006 to 2010.