Pakistan's Iran Conundrum: to Do or Not to Do?

The strategic geopolitical landscape of South Asia is punctuated by the persistent challenges and opportunities that arise from cross-border energy projects. One such significant project is the Iran-Pakistan gas pipeline. The project, conceived to alleviate Pakistan's burgeoning energy needs, faces numerous hurdles, primarily due to the geopolitical tensions and sanctions imposed by the United States.

Background

The Iran-Pakistan gas pipeline project, often termed the Peace Pipeline, was initiated with an agreement signed on May 24, 2009, between then-Presidents Asif Ali Zardari of Pakistan and Mahmoud Ahmadinejad of Iran. The pact involved the construction of a gas pipeline from Iran’s South Pars gas field to deliver natural gas to Pakistan. The pipeline was planned to extend approximately 781 kilometres within Pakistan from the Iran-Pakistan border near Gwadar to Nawabshah in Sindh. This venture was envisioned to bolster Pakistan's energy security by providing a steady supply of natural gas to meet the country's increasing energy demands.

While Iran has completed its portion of the pipeline, extending over 1,100 kilometres to the Pakistani border, Pakistan has faced significant challenges in progressing with its project segment. The primary obstacle has been the imposition of U.S. sanctions under the Countering America's Adversaries Through Sanctions Act (CAATSA). The U.S. has been extensively resorting to CAATSA to scare away nations desirous of establishing trade relations with Iran. These sanctions aim to deter significant economic partnerships and transactions with Iran, especially in sectors like energy, which are seen as vital to Iran’s economic expansion.

The U.S. has exerted substantial pressure on Pakistan to prevent it from engaging in energy trade with Iran, citing the potential for such cooperation to undercut international efforts to limit Iran’s nuclear program and regional influence. As a result, the progression of the Peace Pipeline has been significantly impeded, placing Pakistan in a precarious position. Last month, when President Raisi, the first Iranian president to visit Pakistan in eight years, spoke of increasing the bilateral trade to $10bn a year over the next five years from the current $2bn, there was an immediate response from the U.S. State Department, unambiguously dangling the Damocles sword of sanctions.

This has threatened the direct benefits of the pipeline regarding energy security and posed broader implications for Pakistan's economic stability.

To complicate matters further, there is a penalty clause in the Iran gas deal. Last year, Pakistan's Public Accounts Committee announced that Pakistan was liable to pay $ 18 billion in penalties for not meeting its obligations as Iran, on its part, has already spent billions to complete the pipeline. Iran has granted a 180-day extension until September 2024 to avoid legal action in international courts. Diplomatic relations between Pakistan and Iran could go South rapidly if Iran pursues legal action to protect its rights regarding the pipeline project.

Analysis

The Iran-Pakistan gas pipeline, while economically alluring due to its promise of a steady supply of affordable natural gas, sits at a contentious intersection of geopolitics and strategic energy planning for Pakistan.

From an economic perspective, the pipeline's completion would significantly alleviate Pakistan's energy scarcity, which is driven by its dwindling natural gas reserves and escalating demand due to population growth and industrialization. The prospect of a stable and potentially cheaper energy source from a neighbouring country holds immense appeal, as it could catalyze various sectors of the economy by reducing energy costs and improving reliability.

Strategically, this pipeline represents an opportunity for Pakistan to diversify its energy imports. Currently, Pakistan heavily relies on the Gulf states for its oil and gas needs. Reducing this dependency could enhance its energy security and give it more leeway in foreign policy and economic negotiations. Furthermore, the pipeline could serve as a vital artery for energy in South Asia, potentially positioning Pakistan as a pivotal player in regional energy markets. It may be recollected that this Peace Pipeline or IPI was to be extended up to India till India withdrew from the project in 2009 under U.S. pressure.

However, these economic and strategic benefits are shadowed by considerable geopolitical risks. The U.S. has a pronounced policy of economically isolating Iran due to its nuclear ambitions and regional activities deemed destabilizing by Washington and its allies. Engaging in a major energy project with Iran places Pakistan at risk of falling afoul of U.S. sanctions, which could lead to severe economic repercussions. These could range from direct financial penalties to more extensive economic impacts, such as reduced foreign investment and difficulties accessing international financial markets.

The geopolitical landscape is further complicated by the involvement of other major powers, particularly China and Russia, both of whom have shown willingness to challenge U.S. hegemony and could potentially support the project. China, with its significant investments in Pakistan through the China-Pakistan Economic Corridor (CPEC), has strategic interests in enhancing Pakistan's energy security to ensure its investments' stability and profitability. Russia, too, has shown interest in supporting energy projects in the region to expand its influence in South Asia and counterbalance U.S. interests.

Given these dynamics, Pakistan might explore negotiating a middle path. This could involve initiating partial activation of the pipeline, perhaps with tacit support from China and Russia, to test the waters of U.S. response while minimizing the risk of severe sanctions. Such a strategy would require delicate diplomatic manoeuvring, balancing the benefits of the pipeline against the potential fallout from defying U.S. sanctions. As a placating measure to Iran, Pakistan has announced that 80 km of the pipeline would be constructed once the finances have been arranged.

Internally, the decision to proceed with the pipeline must also consider the implications for Pakistan's relationship with the International Monetary Fund (IMF) and other international financial bodies. Compliance with international sanctions is often a prerequisite for financial aid and support, which Pakistan has relied upon to stabilize its economy. Thus, the decision to move forward with the Iran-Pakistan pipeline is not merely a matter of energy policy but a significant foreign policy decision that could define Pakistan's international relations for decades.