In an interview for Goldman Sachs’ Top of Mind, Rhodium founding partner Daniel Rosen discussed the US-China investment relationship, the Trump administration’s Section 301 case, and the push for tighter screening under the Committee on Foreign Investment in the United States. The full report is available for download.

Global oil prices have moved to a higher equilibrium of $62 a barrel, thanks to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and global economic recovery. That is mildly bad news for, say, Narendra Modi, the leader of a major oil importer heading into an election year with a tight budget. But there is an alternative viewpoint beginning to gain ground in Wall Street and the global energy industry. In this scenario, a storm of shale oil is building on the horizon and will flood oil markets by year-end.

The foundation of all this is the Permian basin, a Texan rock formation that has been producing hydrocarbons for nearly a century. Already the second-largest geological oil source in the world, new surveying is leading to a belief that the Permian has shale riches on a mind-boggling scale. Last year the US Geological Survey concluded that the single Wolfcamp stratum of the Permian had 20 billion barrels of recoverable oil. Today, firms like Pioneer Natural Resources say two strata, Wolfcamp and Spraberry, could have as much as 75 billion barrels.

Said a senior partner in a US-based energy consultancy, “This could be the size of Saudi Arabia’s Ghazar.” Ghazar, the largest oilfield in the world, is the heart of Saudi Arabia’s petro-power and produces 5 million barrels of oil per day.

A ‘new Permian age’ seems to be breaking even as technological advances in shale production continue apace. The time between discovery of a well and actual pumping by a rig is now down to 10 days; the cost of the entire process is down to $10 million. Even deep 4-kilometre drills have a turnaround time of less than a month. The International Energy Agency (IEA) in its Oil Market Report last month was among the first mainstream organisations to warn of an “explosive” increase in US shale production.

The head of analysis for one of the largest Wall Street investment funds said in New Delhi, “By year-end, definitely by early next year, the US will overtake Saudi Arabia oil production. Next year, it will overtake Russia to become the world’s largest oil producer.” One of the largest US investment bankers is considering a scenario where oil prices fall to $45 a barrel and US oil production reaches 10 million barrels a day — and beyond.

Others predict a more gradual fall, if only because US shale producers may prefer to leave the spigots half-open, keep prices in the sixties and pocket fatter profits.

The other headache for the oil industry is the degree to which other energy sources — renewables and gas — is holding back oil demand. Despite economic growth predicted in every part of the world, the IEA has predicted oil demand this year will barely budge from its 2017 levels.

World oil prices are on a knife’s edge. “Oil is on a price threshold. A small swing in demand or supply could drive prices dramatically in one direction or another,” said the investment fund analyst. The Permian is pushing the probabilities towards slump rather than spike. It would be an echo of the earlier but smaller shale wave that broke the back of oil prices in 2014.

What could make all this permanent is a changing mindset. BP chief economist Spencer Dale argues that major oil producers are shifting to a view that keeping black gold in the ground makes less and less economic sense. A lot of their oil may never find a buyer, ever. If a shale wave or a renewable revolution pushes this fear into belief, the five cheapest oil producers — the Ten Dollar Barrel Production Club led by Saudi Arabia, Iraq and Iran — may decide to pump for glory. They would accept oil at $ 30-40 a barrel but compensate by seizing the market share of expensive oil producers.

Even this would be a doomsday option. “Iran and Saudi Arabia would incur severe budget deficits if oil prices were to collapse,” says West Asian expert Bernard Haykel of Princeton University. But while the Saudi Arabians have financial reserves so they can “weather the storm if the price fall is short term,” Haykel says, Iran would suffer massive domestic unrest if prices fell by $20. Costly oil producers like Russia and Nigeria would simply be flattened.

Permian is the place name that is keeping both businessmen and politicians awake at night. Whatever happens, says almost everyone, $100 a barrel will never happen again. The question is whether $50 a barrel will also find itself in the dustbin of history in the next few years.

© 2018 The Hindustan Times.

Since it came to power, the Narendra Modi government has believed India can afford to “bat on its front foot” in foreign policy. Or, as a Chinese newspaper editorialised, India now had a government that would not be scared to offend others. The Modi government believes 2017 was marked by eight foreign policy actions in which, as a senior Indian official said, “defied precedent, didn’t operate within an ideological construct and didn’t do what we were expected to do.” These were:

1. Belt-Road Initiative: New Delhi, with Modi himself deeply involved, carefully weighed what BRI would mean for Indian interests. Once it got a thumbs down, India decided it was prepared to stand alone, do so publicly and oppose the entire Chinese programme. Since then a number of countries including Japan, Germany and most recently the United States have expressed reservations about BRI. “A moment we decided to stand up,” said an Indian diplomat.

2. Doklam. The Chinese had been building a road in the trijunction since 2011. The UPA had concluded it was just normal border road upgrading. But the Modi government decided Beijing had a different plan in mind: force Bhutan to surrender territory, expose India as spineless and drive a wedge between New Delhi and Thimpu. In the game of chicken that followed, Xi Jinping decided to blink first.

3.International Court of Justice. Traditionally, because of fears over Kashmir votes, India has avoided diplomatic confrontations with the big five UN Security Council members. New Delhi waged a “brutal” campaign against the UK to get an Indian judge on the court, admitted a diplomat. But New Delhi sent a message that it will take getting a foothold in such multilateral rules-making bodies more seriously.

4. Kulbushan Jadhav. Tangentially related was India’s surprising decision to take the Jadhav case to the International Court of Justice. India’s Kashmirphobia meant it had a tradition of never taking bilateral issues with Pakistan to the court or to any multilateral body. Islamabad was blind-sided by the move. And it allowed India to make a legal case on the basis of consular access rather than espionage. The first battle went to India and the foreign ministry is already readying for round two in 2018.

The Maldives, an island paradise for tourists, is ruled by a geopolitical serpent. The Maldivian president, Abdulla Yameen Abdul Gayoom, has been using Chinese money and Saudi Arabia-backed Islamicism to throttle his country’s democratic polity. The direction he is taking the strategically important Indian Ocean archipelagic state is raising eyebrows in New Delhi.

Yameen just completed a four-day state visit to Beijing where he signed free trade and maritime agreements with China. In of themselves, these are innocuous. Placed in the ways and means of Yameen’s past four years of rule, his actions are less benign. “We are weighing our options,” said a senior Indian official when asked about developments in the Maldives.

Yameen defeated the liberal candidate, Mohamed Nasheed, in elections in 2013. Since then, however, he has used his hold of the police and judiciary to persecute his political opponents.

With presidential elections due next year, Yameen’s tastes for foreign funding and repressions have increased. The political winds don’t favour him. In local council elections in May, Nasheed’s Maldivian Democratic Party and its allies won 319 seats against the ruling party’s 191.

The Maldivian president has been throwing around China cards since he came to power. Xi Jinping became the first Chinese leader to visit the country in 2014. China was then granted large scale infrastructure contracts, including a bridge connecting the main Maldivian islands, port facilities and an airport. The IMF has projected the Maldives’ external debt, presently 34.7%, will reach 51% of GDP by 2021. Two thirds of this debt is Chinese held.

By Indian assessments these projects carry price tags two to three times higher than normal. The assumption is Yameen and his cronies have been lining their pockets. The piper has already begun calling the tune. Three Chinese naval ships docked in Male in August and the Maldives has endorsed the Belt Road Initiative. India has seen this script before: It is a rerun of Mahinda Rajapaksa government’s attempt to leverage Beijing and distance himself from New Delhi.

India is also watching Yameen’s other international link: Saudi Arabia. The Maldivian president has used local gangs with Islamicist links to muscle his domestic opponents. A number of liberal bloggers and journalists have since been killed or disappeared. At Riyadh’s behest, Yameen has broken relations with Iran and Qatar. More dangerously, about 100 to 200 Maldivians have joined the ranks of Islamic State. However, Yameen’s relations were with Saudi Arabian factions who were recently purged by the present crown prince. New Delhi is already in communication with Riyadh.

New Delhi has shown its displeasure indirectly. The Maldives is the only South Asian neighbour that Indian Prime Minister Narendra Modi has not visited. It is likely India will wait to see what happens in the elections next year. The ballot box helped remove Rajapaksa from office. The danger is that Yameen seems to be trying to ensure the elections will not matter. At that point, India’s options may narrow dramatically.

 ©2017 The Hindustan Times

U.S. Secretary of State Rex Tillerson recently made his maiden state visit to India. As is the norm, before his departure he outlined the Trump administration’s policy towards India. From a geopolitical perspective, what was more interesting was that Tillerson, for the first time, laid out Washington’s view of China’s trillion-dollar, four continent infrastructure program, the Belt Road Initiative (BRI). Much to the pleasure of India, the country that has been the most vocally opposed to the BRI, the US Secretary was bitingly negative.

Tillerson gave as an example of “predatory economics” the “activities and actions of others in the region, in particular China, and the financing mechanisms it brings to many of these countries, which result in saddling them with enormous levels of debt.” He said that “it’s important that we begin to develop some means of countering that (…) we’re starting a quiet conversation in a multilateral way on how can we create alternative financing mechanisms.” During his October visit, he also warned about the strings Beijing attached to its cheap cash. “Countries have to decide, what are they willing to pay to secure their sovereignty and their future control of their economies?”

A few days before, Pentagon chief James Mattis had hinted at growing US concerns over the BRI, referring to it by its earlier name One Belt, One Road. “In a globalized world, there are many belts and many roads and no one nation should put itself into a position of dictating ‘one belt, one road’,” he said at a US senate hearing. He also noted that the Chinese were building in “disputed” territory.

In India this was interpreted as a reference to the China-Pakistan Economic Corridor (CPEC), the 62 billion dollar flagship program of BRI that runs from the Chinese western province of Xinjiang down through Pakistan to the Arabian Sea. However, it was the overall tenor of the US’s public statements – and the even harder position taken by senior Trump administration officials in private – that was music to New Delhi’s ears. Until recently, India had been a loud but solo voice in criticizing the BRI. While India publicly cites the fact that CPEC runs through a part of Pakistani-held Kashmir that is claimed by New Delhi, India’s primary objection is an entrenched belief that BRI will fundamentally tilt the geopolitics of Asia in China’s favor – even while officially supporting all connectivity initiatives.

The BRI, first announced in 2013, has a land-based Silk Road Economic Belt that would stretch from China across the Eurasian land mass, and a 21st Century Maritime Silk Road, which would include marine infrastructure in the western Pacific and Indian Ocean littorals.

Few doubt the benefits to trade and mobility that will ensue from these massive projects. It is the politics, financing and conditions China is putting on investment that worry skeptics like India, especially regarding the land portion of the initiative.

Chinese officials and scholars have sought to explain the CPEC to their Indian counterparts as a huge stabilizing influence on a volatile Pakistan.

New Delhi remained unconvinced, especially when it became clear that a large part of the money was given to the Pakistani military – which India sees as the source of the Pakistani state’s addiction to terrorism. Through 2015, New Delhi did not actively oppose BRI and offered to hold discussions with Beijing about the nature of the projects, offers Beijing rebuffed.

Last year, India hardened its stance. The reason: Sri Lanka. New Delhi supported the idea of Chinese capital being used to bridge the infrastructure funding gap in emerging economies. But it wanted the money to be provided through accepted global norms of transparency and viability. Hence India’s support for a slew of new Chinese-dominated development banks, like the Asian Infrastructure and Investment Bank.

The Chinese began developing the port of Hambantota in Sri Lanka in 2009, but when the country’s government allowed Chinese nuclear-powered submarines to dock there in 2014, India saw red.

This confirmed New Delhi’s suspicions that the BRI was not a global public good but a financial instrument meant to suborn other governments to Beijing’s will, using a mix of investment, debt and bribery. Indian officials looked further afield and saw that Beijing had done the same in Laos and Cambodia.

China’s moves command widespread support in Pakistan – although dissent has been heard and Pakistani businesses complain that the lion’s share of the contracts has gone to Chinese firms as has much of the employment. Beijing revealed that more than 90% of the corridor would be financed through debt that would be on Pakistan’s books.

The original China Development Bank master plan, recently published in the Pakistani media, outlined a reworking of Pakistan’s economy to make it a quasi-colony of China.

Against this backdrop, the Indian government has been surprised at how much effort China put into wooing India to endorse the BRI. Beijing repeatedly came up with different solutions, albeit symbolic, to get India on board.

The likely reason is that early last year, Beijing was insisting to various state-owned banks and funders backing the initiative that their projects be commercially viable.

In this context, India becomes much more important. Tom Miller, the author of a book on the BRI called China’s Asian Dream, says Chinese officials speak of losing 80% of their investment in Pakistan and 50% in Myanmar. But if BRI projects could tap into India’s 2.5 trillion dollar economy or even directly link to each other via India, they would become much more viable.

In an indication of how useful New Delhi’s cooperation could be to the BRI, a recent Credit Suisse report concluded that India could be the largest single recipient of Chinese investment in the initiative. Of an estimated 502 billion dollars that China would spend over the next five years on the BRI, it estimated India could receive as much as 126 billion.

While this gives India potential leverage with China, the prevailing mood in New Delhi seems to be to completely oppose BRI in South Asia and the Indo-Pacific region.

India’s hard line is being helped by the second thoughts expressed by key countries regarding the BRI. A number of governments have issued joint statements with India supporting the principle of “connectivity infrastructure” that is based on “international standards,” “responsible debt financing practices” and “respect of sovereignty.” This has included countries like Japan and, more guardedly, Russia. In private, Germany and some Southeast Asian countries have also informed India of their intention to quietly oppose BRI. However, no one has been willing to join India in openly calling out China – until Tillerson’s speech last month.

India has begun trying to piece together alternatives to the BRI in its immediate neighborhood and in the Indian Ocean. India has a poor record of building infrastructure, but backing from Japan, both technically and financially, has made other countries see its recent plans as credible.

Japan and India have been building a network of road, rail and port links along the Bay of Bengal. The infrastructure is designed to increase east-west connectivity between South and Southeast Asia and thus counter the north-south links being rolled out by China. Similar plans for ports are now being drawn up for Sri Lanka and other Indian Ocean islands. New Delhi has invited Tokyo to help it revive schemes for transport corridors from Iran’s coast to Afghanistan and Central Asia. The two recently announced plans for an India-Japan Africa Connectivity Corridor which will be both land and maritime, with its first nodes in Kenya and Mozambique.

Indian officials now openly call the BRI a “neo-colonial” project and see it largely as a cover for China to convert its financial muscle into political and military control.

© 2017 Aspen Institute Italia

In calling a snap parliamentary election on June 8, Prime Minister Theresa May of Britain could not resist the lure of her double-digit opinion poll leads to seek a mandate for her plans to lead the country out of the European Union. She also has an urgent political need for a stronger personal power base from which to stare down her own Conservative right-wingers clamoring for a hard line in the negotiations with Brussels over the Brexit terms.

May’s gambit is politically cynical for a leader who has repeatedly vowed not to call for such an election. But her action is also entirely understandable and indeed the decent thing to do. She needs a personal mandate on the eve of one of the most momentous events in UK history in at least a generation. If her party wins in June, she could have until at least 2022 to oversee the Brexit process.

May is the early favorite to win a sizable election victory, which could substantially increase her Conservative Party majority. On the other hand, it would be a mistake to believe that such a triumph would give her a new advantage in negotiations with the remaining 27 members of the European Union, the so-called EU-27. The logic of the Article 50 negotiations still applies: If there is no deal, the United Kingdom would suffer disproportionally. Any boost to May from an election victory will not make EU-27 negotiators drop their demands for Britain to maintain the legal status of EU and UK citizens after Brexit. Also to be negotiated is the scope of the financial settlement of the UK departure.

Ironically, it may be in the EU-27’s interest that May wins a mandate enabling her to stare down her more wild-eyed Brexiters, who would prefer to see the United Kingdom crash out of the European Union rather than give into any of Brussels’ demands. Only a handsomely reelected prime minister could make the quick concessions on immigration and finances necessary to get an Article 50 deal that the hardliners may find unpalatable. Once reelected, May will be able to dictate the terms of Brexit to her own party. She might push forward with the hard Brexit she has discussed previously. But she might also put softer versions of Brexit back on the table, reducing the chances of an impasse in the negotiations. Certainly, a reelected Theresa May would reduce the risk that no deal is reached with the EU-27, which alone should reduce economic uncertainty. The negotiations are not expected until after the next German elections in September.

But the early election will come at a politically volatile time. Given the United Kingdom’s first-past-the-post electoral system, the Conservative lead in national polls might not translate into as many seats as expected. Perhaps even a nationally weakened Labour Party will manage to hold onto many of its traditional safe seats, now that the UK Independence Party has become a spent political force. And perhaps a resurgent Liberal Democratic party can ride a wave of former Remain voters towards a strong result in the more affluent urban areas, especially if centrist pro-EU Labour voters abandon Jeremy Corbin’s hard-left platform and moderate Conservatives are turned off by May’s hard Brexit rhetoric and social conservatism.

In Northern Ireland, the impending elections upset an already tense political situation, raising the possibility of an election victory for the nationalist party Sinn Fein, a development that could further destabilize politics there. Meanwhile the Scottish National Party will likely relish the opportunity to campaign on the promise of another referendum on Scotland breaking from the United Kingdom, knowing that would likely crush their opponents and obtain a stronger political mandate in future negotiations with London.

All politics is local though, as the saying goes. Perhaps the biggest uncertainty in the election is the role of Brexit in the thinking of voters. Article 50, sanctioning divorce proceedings, has now been launched. Only a highly unlikely landslide against May and the Conservatives could reverse it. British voters may not seek a rerun of the Brexit campaign. Instead they may turn their attention to the traditional domestic bread-and-butter issues of UK politics—the functioning of the National Health Service, rising income inequality, education, and the dominance of London, etc. If British voters have already moved on after the Brexit vote, all other issues are in play.

 © 2017 The Peterson Institute for International Economics

British Prime Minister Theresa May will soon launch divorce proceedings from the European Union under the so-called Article 50 process. Her objective is to leave the Internal Market and the EU customs union, take back control over immigration, and be free of the jurisdiction of the European Court of Justice while maintaining as free a future trading relationship with the EU-27 as possible. Her goal in the two-year timetable called for by Article 50 could not be more different from European negotiators, and therein lie her basic difficulties.

EU-27 leaders are insisting on a settlement of  UK financial liabilities clarifying the future status of EU citizens living in the UK—and UK citizens living in the EU-27—before discussing the future economic relationship. Their leverage is that there is a legal hard stop after the two-year[1] negotiating process, at the end of which the UK simply drops out of the EU unconditionally. May thus needs to make quick progress on the two EU negotiating priorities without getting bogged down on the sequencing of the negotiations.

Undoubtedly, the most controversial issue will be about money and just how large the future common liabilities that the UK has entered into as an EU member are? Up to €60 billion, as Brussels claims, or zero, as the Conservative Party in Westminster believes.

On immigration, the prime minister has a better negotiating position. In their referendum, she argues, Britons indicated they wanted national control over immigration. As interior minister, May earned a reputation as a hardliner on this issue. So far, the UK government has refrained from unilaterally granting residency and working rights to EU citizens who came legally to the UK under the EU’s rules. Such a move would invariably have politically compelled the EU-27 to quickly reciprocate. At an earlier stage of the Brexit process, it could have helped clear a potentially thorny issue from the actual time-limited Article 50 negotiations and spread a lot of goodwill for the UK around other EU member states. Instead, May now has to spend both time and political capital on this issue during the two-year negotiation window, during which the EU-27 is certain to make it more complicated.

Quick mutual recognition of residency and working rights is only one part of citizens’ status after Brexit, however. Even if EU citizens are allowed to stay in the UK, there must also be a discussion of their pension rights, healthcare access, family reunification options, and availability of other public social services.

The complexity of these issues can be seen in Figure 1 and 2, which show where migrants from the UK and EU-27 live.

With more than 800,000 nationals living in the UK, Poland has the most interest in resolving the issue. But the same is true for more than 300,000 British citizens in Spain—two-thirds of whom are over the age of 50. What, for example, are the rights of elderly British citizens in Spain to local public healthcare services?

Like Richard Nixon traveling to China, May could rely on her hawkish reputation to make a deal. She could, for example, offer EU citizens in the UK a British equivalent of the American permanent legal residency (green card) status, giving them not only the right to live and work in the UK but also all auxiliary rights of a UK citizen, such as access to healthcare, pension rights, family reunification, etc.—excluding the right to vote. And after five years, EU citizens could apply for UK citizenship.

Such a move would secure the greatest number of EU workers remaining after Brexit and also remove a contentious issue in the EU negotiations, as the EU would no doubt reciprocate the gesture. It would provide a positive opening for the Article 50 negotiations, making it easier to discuss the other important topics.

The best way for Theresa May to make an early bold move on immigration would be for her to include it in the official letter launching the Article 50 negotiations.

Note: [1] EU-27 members can agree to extend the two-year Article 50 negotiating period, but this looks highly improbable given the requirement for unanimity among the 27 members.

 © 2017 The Peterson Institute 

That someone like Donald Trump has come so close to getting into the Oval Office has rekindled concerns in India about the dependability of the United States as a security partner. The past few years have seen a considerable deepening of Indo-US relations in the military and strategic sphere. But Trump – and the sense that his surprising political rise marks a further breakdown of the US postwar foreign policy consensus – has put some questions on this nascent bond.

When the US presidential election campaign began last year, New Delhi was sanguine about the expected results. On the Democratic side, the Hillary Clinton team included many individuals with a long record of support for closer Indo-US relations. On the Republican side, most of the mainstream candidates like Jeb Bush and Marco Rubio had foreign policy advisors who were also known entities for New Delhi.

After a few years of doubt due to the isolationist tendencies evident during the early years of the Barack Obama administrations, Indo-US relations had been restored to health with the 2014 election of Prime Minister Narendra Modi. Modi and Obama were to develop a close political relationship, one that has seen them meet eight times in just three years – a record for US and Indian leaders. The assumption in New Delhi was that the next US president was almost certain to continue where Obama had left off.

As Trump moved to successfully secure the Republican nomination, a surprised and shocked Indian establishment echoed similar sentiments across the world. Some commentators found a bit of solace in Trump’s generally positive views about India. Early in 2016, Trump declared that India had become a “top place” for investment following Modi’s election, spoke of India “doing great” economically and expressed surprise that more people weren’t talking about the country’s 7%-plus economic growth rate. This seems to have been strongly motivated by the fact that two luxury buildings are being constructed in the Indian cities of Mumbai and Pune by Indian real estate developers but under the Trump franchise name.

Others took pleasure in his derogatory comments about Pakistan, India’s regional rival. “Pakistan is probably the most dangerous country in the world today. The only country that can check Pakistan is India,” Trump said during a radio show in September of last year. This was matched by his talk of a trade war against China and the need for the US to be more aggressive economically against Beijing. Occasionally, Trump also spoke in a similar, if less angry manner about India and the problem of outsourced jobs. He had at least once mimicked an Indian accent to amuse an electoral rally.

However, the Republican candidate’s more visceral attacks against Islam in general and his call for a stronger military response to the Islamic State and similar terrorist groups did excite right-wing Hindu groups. In May, a small fringe group called the Hindu Sena (“Hindu Army”) held a religious festival on the streets of central Delhi in favor of Trump. One of the activists declared, “He’s the only man who can put an end to Islamic terrorism”. This received considerable global media attention. More tangibly, however, was the response of conservative Hindu groups in the US. Shalabh Kumar, a Chicago businessman of Indian origin, donated nearly $900,000 to the Trump campaign because of the strength of his comments about the threat posed by Islam. Kumar, after meeting the candidate, said that Trump had indicated “that the 21st century should be an Indo-American century.”

But these were minority opinions. A Pew Research Center survey in the spring of this year found that Trump received only a 14% approval rating among Indians, though the poll also showed that more than 60% of Indians had no opinion of him at all. By most estimates, 70 to 80% of Indian-Americans will continue to vote for the Democratic Party as they traditionally have.

Of greater concern to New Delhi, however, was what Trump represented in terms of US foreign policy. India’s strategic community believes that Obama’s unwillingness to wield US influence and power in troubled regions of the world encouraged China to lay claim to the South China Sea and provided a lifeline to the Islamic State. Obama started to reverse his earlier isolationism in the last two years of his presidency. In Trump, however, they see an advocate of an even greater “America First” policy, almost going back to pre-World War I isolationism. Trump has spoken of abandoning NATO. In New Delhi’s view this would largely redound in favor of China, the Taliban and Islamic militancy in general.

Trump is also seen as damaging to a carefully constructed partnership between the two countries on climate change under which US financing and technology would help an ambitious Indian renewable energy push. Trump has denounced climate change as a fraud.

There is no shortage of concern regarding exactly what a Trump presidency would mean in terms of US engagement with the rest of the world. But for New Delhi, the most fundamental question is whether Trump (even if he loses) represents the disintegration of a US internationalist posture that has been the backbone of a world order that India was beginning to engage with. If so, then the nature of New Delhi’s foreign and defense policy would require a reorientation that, at the very least, would include a far smaller role for the US and the West in general.

 

Copyright 2016 the Aspen Institute Italia

The Indian government of Prime Minister Narendra Modi has had one overriding policy goal in the nuclear field since its election just over two years ago: to bring closure to New Delhi’s policy of bringing itself out of nuclear sanctions and become a full-fledged member of the international nuclear nonproliferation regime. Modi will visit Washington in June largely as part of a last push before the US elections to get India into two of the treaty organizations that make up part of the regime: the Nuclear Suppliers Group (NSG) and the Missile Technology Control Regime (MTCR).

India had multiple international sanctions imposed on it when it carried out nuclear tests in 1974 and, later, in 1998. New Delhi had long smarted under the sanctions which it saw as inherently unfair. New Delhi had not carried out a nuclear test before the 1967 cut-off date of the Nuclear Nonproliferation Treaty (NPT) as it was wrestling internally over whether a nuclear weapons program was compatible with its early Gandhian foreign policy goals.

It abandoned these ethical considerations once China went nuclear but tested too late to be a recognized nuclear power. The subsequent sanctions were denounced by India as “nuclear apartheid” and were particularly irritating given the poor record of China when it came to proliferation though it was a recognized nuclear power. The NPT was impossible for India to join as it required India to abandon its nuclear weapons arsenal in return for the lifting of sanctions. The ever expanding circle of dual-use technology sanctions that the interlocking nonproliferation agreements– the Wassenar convention, the MTCR, the Australia Group and, topping all of them, the NSG – set up, denied India access to crucial civilian technologies and international reactor investments which led it to have a truncated civilian nuclear program.

As India’s economic growth rate took off after reforms in 1991, the lack of nuclear power and the difficulties that sanctions were imposing on access to even civilian high-end technology began exacting an economic price. Geopolitics provided an opportunity to change this during the George W. Bush administration. Washington, in part because of growing concerns regarding China’s strategic trajectory and because of fears about Islamic terror following 9/11, aggressively began wooing New Delhi as a strategic partner.

After decades of being on opposite sides during the Cold War, however, India demanded a price for this partnership: the end to its nuclear isolation. This was effectively accomplished in 2008, when the so-called Indo-US nuclear deal was completed with the US Congress passing legislation authorizing full-fledged civil nuclear cooperation with India. The US subsequently lobbied the 46-nation NSG to grant India an exemption from technology sanctions.

The deal was a half success for both countries. The Indo-US relationship is now the strongest it has been since the Kennedy years, but the promise of the Bush years has been diluted by isolationist postures of the Obama administration. India’s civil nuclear sector received some benefits, but the passage of a flawed nuclear liability law in 2010 meant both foreign and domestic nuclear component manufacturers steered away from the Indian reactor market. India’s civil nuclear program ironically benefited only marginally from the so-called nuclear deal thanks to its legislative self-goal. However, the lifting of technology sanctions has meant a sharp increase in Indian defense purchases from the US and the West as a whole, as well as a greater ability of Indian firms to acquire sensitive technologies from overseas.

India has in effect three nuclear policies at present. The diplomatically most active policy is to continue to ensure against any future sanctions by becoming a member of these same nonproliferation regimes that it suffered under. In other words, go beyond exemptions to an actual rule-making status. India has been lobbying to get into the NSG and the MTCR as a first step. Though this has been endorsed by the US, individual countries have put up barriers. Italy had opposed India’s joining the MTCR because of its irritation over an unrelated bilateral dispute over the arrest of two Italian marines in a criminal case in India. China and Turkey have run interference to India’s joining the NSG because of their friendship with Pakistan, arguing the latter country should also be allowed to join the NSG.

New Delhi has also pursued bilateral civil nuclear cooperation agreements with key countries, the most notable one being an agreement signed last year with the civilian nuclear sector’s technology leader, Japan. Without Japan’s green light, India was unable to buy imported non-Russian reactors.

A second policy is a vestigial remnant of the original support for global nuclear disarmament that goes back to India’s early pacificist policies, drawn from Mahatma Gandhi and his followers. India remains a supporter of the comprehensive test ban treaty (CTBT) and the more ambitious fissile material cutoff treaty. However, New Delhi has been clear that it will not sign the CTBT until the United States and China both ratify the treaty. However, the Republican-controlled US Congress is hostile to the treaty and refused to ratify it. So it remains in a limbo until Washington ends its own gridlock. The Fissile Material Cutoff Treaty is even further lost in diplomatic doldrums over a host of different issues.

The third nuclear policy is the development of India’s military nuclear arsenal. New Delhi has only announced a bare bones nuclear doctrine, but at its heart is a belief in a small diversified arsenal designed to withstand a first strike by an enemy country. Slowly but steadily India has sought to build a triad – air, land and submarine-based – nuclear deterrent. The last part of this, a set of nuclear armed and powered submarines, has started to come together with the acquisition of a modified Akula class Russian submarine, dubbed in India as “INS Arihant”. The purchase of two more such submarines is under negotiation with Moscow.

India has been careful to avoid an arms race with its nearby nuclear rivals, knowing it could ill afford the economic costs of such escalation and that even the security consequences would be considerable. It has therefore not changed its policy expanding its arsenal at an extremely measured rate, even though China has a much larger nuclear arsenal. Even the fact that in the past few years even Pakistan has probably overtaken India in terms of fissile material stocks has not changed this policy. India is estimated to have a stockpile of 110 to 120 warheads, mated to a set of ballistic missiles with a maximum range of about 5,800km.

Prime Minister Modi has effectively continued the nuclear policies of his predecessors. He has also been actively pursuing India’s membership in the NSG and MTCR, especially in the past year. Curiously, Modi is doing so even though he has been far less enthusiastic about civilian nuclear power, a cornerstone of Indian energy policy since the 1950s. Modi has been far more interested in a massive expansion of solar and wind power and taking India on a renewable energy path in which reactors only play a marginal role. His interest in nuclear power has seemingly been piqued by his strong personal commitment to fighting climate change and the belated recognition that nuclear remains among the only non-carbon emitting source of baseload power. India also sees itself as a potential manufacturer and exporter of smaller reactors now that its liability issues have been resolved.

Renewed interest in nuclear power because of climate change concerns may become the core of a fourth nuclear policy in the years to come. If Modi is able to secure a contract to buy the first imported reactors to come to India since the 1950s – there are reports of negotiations with Westinghouse Toshiba for six reactors coming close to fruition – this policy will become more credible.

But Modi, as befitting a nationalist right-wing politician, seems to have put the righting of what most Indians perceive as a historical wrong regarding nuclear sanctions at the top of his nuclear wish list for the near future.

Copyright 2016 the Aspen Institute Italia

Few Asian countries have had as long and sustained a historical engagement with the Middle East as India. One of mankind’s oldest maritime trading routes ran from ancient Sumeria via Bahrain to the civilization of the Indus Valley. Imperial Britain’s Persian Gulf interests were managed through India and at that time countries like Kuwait and Oman used the rupee as tender.

India’s present policy towards the region has many layers. In one respect it has not changed over the millennia: New Delhi’s focus is almost exclusively on the Persian Gulf, with only minimal interest in the Maghreb and the Levant. But its interests and capabilities have been growing slowly across the board, though it continues to feel the region is too volatile for India to seek an active geopolitical involvement in it.

At stake are two key economic interests for India. First of all, the Gulf countries host six to seven million Indians, the largest such diaspora in the world. This diaspora remits $33 to 35 billion back to India every year. Secondly, roughly three-quarters of India’s oil imports and almost all of its natural gas exports come from this region.

More recently, a third, sectarian issue has been introduced into the equation: Indian concerns about rising Sunni-Shia Muslim tensions in the Middle East and the possibility this might spread to its own Muslim community. India is home to the third largest Sunni and the third largest Shia populations in the world.As a senior Indian diplomat said publicly in January, “West Asia is part of our extended neighborhood and as such continued peace and stability in the region is in our strategic interest.”

New Delhi has thus cultivated a number of important bilateral relations in the region. At present, these include Israel, Iran and some of the Gulf monarchies. Partly because all these relationships are so strong and it would prefer not to have to choose between them, India avoids playing a larger Middle East role.

Bilateral Ties

Israel is probably the closest Middle Eastern friend that India has today. This was not always the case: the two countries normalized diplomatic relations only in 1992. Today, however, India is the single largest buyer of Israeli arms and the only country with which it cooperates on military nuclear technology. New Delhi remains a supporter of Palestinian statehood but its ardor has cooled as Palestinian nationalism has become increasingly tainted with Islamicism. India also maintains close relations with Iran, though they are far less strategic in nature. The interests of the two converge the most in their mutual suspicion of Pakistan and their concerns about militant Sunni groups like the Taliban or the Islamic State. But India has been critical of Iran’s nuclear program, branding it “illegal”. Nonetheless, it has opposed the imposition of economic sanctions and the isolation of Iran in other ways. Indian officials tend to dismiss talk of having any real influence on Tehran but New Delhi is one of the few foreign governments that maintain a direct line to Ayatollah Sayeed Hossein Ali Khamanei. Therefore it has repeatedly tried to serve as a bridge between Iran and the West.

More recently, India’s relations with the Arab Gulf states have also increased both in breadth and depth.The economic relationship was always a given. Taken as a region, West Asia is easily India’s largest trading partner,asIndia imports gas from Qatar and oilfrom Saudi Arabia and Kuwait, while Indian corporations’ use Dubai as an offshore financial hub.However, for a long time, there was minimal strategic cooperation. India has long seen Saudi Arabia as an ideological fount of the forms of radical Islam it has sought to keep off its soil. Additionally, the strong connections between the Arab monarchies in the region and Pakistan have not been viewed favorably. The closest Arab country to India is the relatively liberal but resource-poor sultanate of Oman.

This aloofness has begun to change in recent times, helped by the shifting geopolitical landscape of the Gulf region. Led by the United Arab Emirates, the Gulf countries have begun to seek a closer strategic relationship with India, urging closer military ties, helping out on the counterterrorism front and increasing high-level political engagement. This is partly driven by these countries disenchantment with Pakistan, partly by India’s economic trajectory, but also by a desire to hedge their position in theIndian Ocean, siding with the number two military power in that region at a time that the number one power, the United States, is showing less and less interest in being the Gulf’s policeman.

Keeping a Distance

To simultaneously maintain all these multiple relationships, India has also had to carefully step over the region’s many fault lines. Because of its overriding interest in Gulf stability, India has had an unspoken preference for dictators and kings over volatile popular regimes. It is skepticalthat secularism can thrive here in a democratic context – and fears that a less secular Middle East will mean a more radicalized one. New Delhi has been less than pleased with Western experiments with the Arab polity, whether overthrowing Saddam Hussein in Iraq or supporting the popular revolts of the Arab Spring. A government statement on India’s Middle East policy noted recently, “After almost five years of ‘Arab Spring’ in the region, the earlier exaggerated expectations of progress towards democracy have turned out to be misplaced. On the whole, developments over the last few years have exacerbated the regional fault lines, accentuated regional rivalries with competing ideologies and skewed the regional balance of power.”

Given its diaspora, its energy needs and its terrorism concerns, New Delhi prefers to remain passively on the Middle East’s margins. Nonetheless, with Middle East showing more interest in India, New Delhi has not been above levering this to its benefit. It has exploited the opportunity in three ways.

One, it has sought to dilute Pakistan’s influence in the Gulf region. This has proved successful with the UAE and, to some extent, Saudi Arabia – both of whom have been long-standing backers of Pakistan’s military.Two, it has sought to better its energy position with its Middle Eastern suppliers, renegotiating prices and trying to increase its equity holdings in oil and gasfields across the region. The latter has been of limited success largely because India’s oil and gas firms are relatively small in size – and many have preferred to seek energy assets in Africa and Southeast Asia. But Qatar, the provider of 95 per cent of India’s imported gas, just agreed to slash its natural gas prices by half.Three, India has been seeking better counterterrorism cooperation from the countries in the region, both for preventive reasons against the Islamic State and in pursuit of a more proactive approach against Afghanistan-Pakistan based terror groups. That it now receives active intelligence cooperation from close friends of Islamabad like Riyadh is seen as a major success in New Delhi.

However, India has declined to involve itself in the larger role of trying to stabilize the Middle East. This is seen as well beyond its strategic ambit. It believes it can ill afford to be involved in sectarian conflicts in places as far away as Syria. Instead it publicly and privately continues to urge the US to remain engaged there, calculating Washington is still the only external power capable of restoring some order to the region. It is not overly concerned about China’s geopolitical presence in West Asia: the Chinese are tone deaf to Arab Muslim cultural mores and are geographically too far to be really interested. Beijing, in fact, has been urging India to become more active in the region.

Conscious of criticism, even from Middle Eastern countries, that it could do more, India argues it is doing more than ever but is constrained on a number of fronts. The Indian senior diplomat said in January, “It needs to be understood that ‘old order neutrality’ is not construed as absence of decision-making or political passivity. In fact, we are more engaged in the region than in the past.

India has been asked to play more active role in the Middle East but we need to assess this based on our strategic leverages and realistic consideration of our strengths and limitations. We would not wish to create parallel mechanisms that will affect our bilateral relations.” As a US diplomat privately put it, “India is a strategic partner to both Iran and Israel, and neither of them object, and that is an accomplishment of sorts.”

Copyright 2016 the Aspen Institute Italia