Why Chabahar Agreement Is Important For Iran? – Analysis


The Chabahar agreement which entails the development of free trade zone could be capitalised to generate employment and rope in investments.

By Paras Ratna*

Ever since Iran proposed the Chabahar port development project to India, there had been several articles and papers in the Indian media. Analysts interpreted the tripartite agreement, signed between India, Afghanistan and Iran in May last year to develop the strategic port and build a transport-and-trade corridor through Afghanistan that could halve the time and cost of doing business with Europe, based on their ideological situatedness. Notwithstanding the ideological rift, the “Indian” factor looms large over their interpretation while other aspects get overshadowed. Iran’s quest for developing Chabahar falls in the latter. Hence, it becomes pertinent to analyse the significance of Chabahar from the Iranian perspective.

Chabahar, Iran’s only oceanic-port and a coastal city and an ancient trading centre, is back in the limelight (after years of oblivion) post Chabahar tripartite agreement. Also known as Tiz, it is Iran’s only port with direct access to the Indian Ocean, and 800 Km more closer to Afghanistan than Pakistan’s Karachi port. Chabahar is located in the Sistan, Baluchistan province. With an area of 187,500 sq Km, it is one of the largest province in Iran, sharing a 1,600 Km joint border with Pakistan and Afghanistan with coastal boundary of around 300 Km.

The economic consideration in Iranian policy making, which used to be subservient to political ideology, is beginning to assert itself. Conservative ideologies are giving room for liberal agenda. The victory of President Rouhani in the recent election is a big boost to the reformist agenda. The domestic social liberalisation calls for greater engagement rather than confrontation. The Chabahar agreement is Iran’s call for “engagement”.

The agreement, if realised, could be a breather for Iran’s limping economy which has an unemployment rate of 12.4%. The vital aspects of agreement include the development of Chabahar port and a trade corridor and free trade zone. It entails massive foreign investment which has the potential to offset years of stagnation for Iran in general, and the Sistan-Baluchistan region in particular. A World Bank study reveals that gains from the easing of sanctions are largest for Iran as it would lead to an increase of per capita welfare of 3.7%.

Contextualising Chabahar agreement

Sistan-Baluchistan is one of the most backward and conflict ridden zone of Iran. Insurgent Sunni groups like Jundullah are waging an armed rebellion against the Shite state. Conservative governments in the past had viewed this region with suspicion. The demands for autonomy was met with resistance and were perceived as a threat to Iranian sovereignty. Locals allege that the demographic balance of the region has shifted in the favour of new-comers and natives are systematically excluded from political, administrative and economic apparatus. The demands of minorities were suppressed and the security consideration took precedence over developmental needs. As a result, the region fares poorly in comparison to other provinces of Iran. The blue coloured region (26) with least HDI ranging from 0.6-0.650 is Sistan-Baluchistan province. In 2001, Tehran (11) with 0.791 held the lead while in 2009, Khuzestan (21) with 0.891 topped the list and Tehran dropped to three. However, Sistan-Baluchistan consistently remained the least developed province of the region.

Iran provinces. Source: Sabermahani et.al (2013)
Iran provinces. Source: Sabermahani et.al (2013)
SI. NO STATUS Province






The most developed

The most Deprived

Yazd, Semnan, Esfahan, KhorasanRazavi, Manzandaran, Tehran, Qom, Qazvin, Eastern Azerbaizan, Fars, Markazi

Southern Khorasan, Zanjan, Golestan, Hamdan, Ardebil, Kurdistan, Gilan, Kermanshah, Ilam, Chahar-Mahal, Khuzestan.

Western Azerbijan, Kerman, Bushehr, Lorestan, Kokhiluye, Northern Khorasan, Homozagan, Sistan and Baluchistan


Sistan and Baluchistan

Source: Biranvandzadeh.et.al (2015)

However, with the reformist agenda gaining currency, the region is viewed as an answer to Iran’s stagnating economy. Security considerations have given way to economic logic. Chabahar provides Iran access to the Indian Ocean. It is Iran’s only deep water port and will be able to handle cargoes of 2,50,000 ton vessels where Bandar Abbas can handle only up to 100,000 ton. As of now, cargoes in 250,000 ton ships, which are the international norm, are trans-shipped from Dubai.

Political realignment

The Chabahar agreement also symbolises realignment of Iranian domestic politics. It offers a window to reformist faction to consolidate their gains. The minority Sunni population had high electoral turn-out in Iran. Analysts are attributing Rouhani’s landslide victory to his minority base. President Rouhani has time and again reiterated his unwavering commitment towards equal treatment of its citizens.

This has a potential to decisively tilt the balance of domestic political scale towards moderates. On the flip side, increasing attention to minority demands might lead to pervasive anxiety in the conservative camps. They view regional/ethnic demands as a path to separatism. It can further polarise the contours of Iranian politics. Either way, realisation of the Chabahar agreement would substantially impact the political trajectory of Iran, more so in the favour of moderates.

Major takeaways for Iran

The Chabahar agreement could give tremendous boost to President Rouhani’s credibility in the country and could offset the ills of sanction era. Apart from accruing economic benefits, it will also boost Iran’s stature in South Asia as well as Arab world. Realisation of the Chabahar agreement would make the region as a transit hub, since major economic corridors like INSTC (International North South Transport corridor) can also pass through it. It would further diversify Iran’s economic engagements and would dilute the quasi monopoly of Chinese and Russian firms on crucial sectors like crude oil and petrochemical products.

Post embargo, the Indo-Iranian trade relation is witnessing an upward trajectory. India is Iran’s second most export destination. Top export destinations of Iran are tabulated below.

Source: MIT, 2015.
Source: MIT, 2015.

Indian export to Iran too has gone up by 5.33%, from 262,290.13 US$ million to 276,280.29US$ million. The import of items like iron and steel, minerals, fuels, iron ores etc. have shown tremendous surge in the current fiscal year.

Values in USD million

Items 2015-16 2016-17
Iron & Steel 6.99 15.32
Aluminium articles 0.00 4.93
Mineral fuel & oil 4461.57 9006.29
Ores, slag & ash 0.34 11.64

Source: Ministry of Commerce & Industry

Given India’s emphasis on the manufacturing sector, the import of aforementioned item is bound to increase leaps and bound, opening a door for Iran to earn much needed FOREX. In this context, Chabahar port best serves the Iranian purpose by linking it to India’s western coast. Oil is another vital component of the Indo-Iranian trade relationship. At the bilateral meeting in 2016, Prime Minister Narendra Modi expressed willingness to double the oil imports. As of May 2017, Iran replaced Iraq as India’s second biggest oil supplier. The imports from Iran rose to 647,000 barrels per day in February this year.

Reports suggest that the proposed corridor would reduce the transportation time by 50 percent and transportation cost by 60 percent. Thus, Iran is all set to become a transit hub. Chabahar agreement has the potential to offset the bottlenecks in Iranian economy and restore it to pre-sanction level.

Hence, it is pertinent for President Rouhani to maintain the ongoing momentum with respect to the Chabahar agreement and remove bureaucratic hurdles for swift realisation of the same. The attitude of the administration of US President Donal Trump towards Iran, however, could play a spoil sport. But, considering the benefits of Chabahar agreement for Iran and the region at large, it makes sense for President Rouhani to practise restraint rather than confrontation.

*The author is a research scholar at TISS

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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