Subject: International Stories of Key Importance

PYQ Relevance [UPSC 2019] What introduces friction into the ties between India and the United States is that Washington is still unable to find for India a position in its global strategy, which would satisfy India’s national self-esteem and ambitions’. Explain with suitable examples. Linkage: UPSC GS-II frequently examines how great-power strategies affect India’s strategic autonomy, especially in the context of U.S. unilateralism, sanctions, trade coercion, and global power realignments.

Mentor’s Comment

Recent U.S. trade and sanctions measures aimed at Russia, China, and third-country partners mark a decisive shift from market-led globalisation to coercive economic statecraft. The article examines how aggressive tariff threats, secondary sanctions, and currency weaponisation are accelerating global de-dollarisation pressures, with India emerging as a key collateral stakeholder in a fragmenting global financial order.

Why in the News

The U.S. administration has proposed tariffs of up to 500% on countries importing Russian oil. It has also expanded sanctions on Russian and Venezuelan energy assets. This represents a shift from targeted sanctions to secondary economic coercion, affecting neutral partners like India. At the same time, growing non-dollar energy settlements and China’s yuan-based oil trade indicate stress in the dollar-centric system, raising concerns over trade stability, capital flows, and autonomy of emerging economies.

How has economic coercion replaced market-led globalisation?

1. Secondary sanctions: Extends U.S. trade penalties to third countries purchasing Russian oil, redefining neutrality as non-compliance.
2. Punitive tariffs: Proposals of up to 500% import tariffs convert trade policy into a deterrence instrument rather than a competitiveness tool.
3. Asset targeting: Sanctions on Russian and Venezuelan energy infrastructure weaken supply-side stability rather than isolating individual firms.
4. Systemic impact: Shifts global trade from rules-based predictability to power-based negotiation.

Why is the dollar’s centrality increasingly contested?

1. Currency weaponisation: Repeated use of the dollar-clearing system for sanctions enforcement erodes trust among trading partners.
2. Trade settlement diversification: Russia now conducts over 20% of its crude exports outside the dollar system.
3. Historical contrast: The dollar underpinned global finance throughout the late 20th century due to neutrality and liquidity, not coercion.
4. Structural signal: Reduced dollar reliance reflects risk hedging, not ideological alignment.

How are energy markets driving de-dollarisation?

1. Non-dollar oil trade: China’s payment for Russian crude in yuan indicates partial energy-market realignment.
2. Discount-driven trade: India’s increased Russian oil imports reflect price arbitrage rather than political alignment.
3. Settlement experimentation: Bilateral currency mechanisms reduce exposure to sanctions-induced payment disruptions.
4. Market fragmentation: Energy trade increasingly follows geopolitical blocs rather than price efficiency alone.

What are the implications for India’s trade and exports?

1. Export vulnerability: U.S. tariffs could affect textiles, footwear, marine products, pharmaceuticals, electronics, and engineering goods.
2. Negotiating asymmetry: India faces pressure to absorb geopolitical costs despite non-alignment.
3. Investment uncertainty: Escalating trade coercion weakens investor confidence amid already volatile capital flows.
4. Macroeconomic stress: Potential spillovers include currency pressure, trade deficits, and costlier imports.

How does China’s trade posture differ from India’s exposure?

1. Export diversification: China has significantly reduced dependence on U.S. markets through diversified trade corridors.
2. Scale advantage: China’s large domestic market cushions external shocks.
3. Strategic insulation: India’s export basket remains more sensitive to Western market access.
4. Asymmetric resilience: De-dollarisation favours economies with manufacturing scale and settlement alternatives.

Is the global financial architecture entering a transition phase?

1. Multipolar currency signals: Rise of yuan, local currencies, and barter-like arrangements.
2. Erosion of predictability: Sanctions-driven finance increases transaction costs and compliance risks.
3. Institutional strain: Bretton Woods-era assumptions face stress from unilateral enforcement actions.
4. Systemic uncertainty: The issue extends beyond geopolitics to the architecture of global trade itself.

Conclusion

The expanding use of sanctions, tariffs, and financial leverage by the United States signals a shift from a rules-based economic order to coercive geo-economics, weakening trust in the dollar-centric system. For India, this moment underscores the necessity of safeguarding strategic autonomy through diversified trade partnerships, resilient payment mechanisms, and calibrated engagement with competing power blocs in a transitioning global financial order.

PYQ Relevance [UPSC 2018] In what ways would the ongoing US-Iran Nuclear Pact Controversy affect the national interest of India? How should India respond to this situation? Linkage: It falls under GS II-Effect of policies and politics of developed countries on India’s interests, focusing on sanctions, energy security, strategic autonomy, and West Asia stability. Iran’s unrest and economic collapse show how the U.S.-Iran nuclear dispute disrupts regional stability and directly affects India’s energy security and connectivity interests.

Mentor’s Comment

Iran is witnessing its most serious internal crisis since the 2022-23 unrest, marked by economic collapse, mass protests, and renewed geopolitical pressure. The current phase of instability is unfolding in the immediate aftermath of a brief but intense war with Israel and amid heightened U.S. coercive posturing. This editorial examines how domestic economic fragility, external pressures, and governance constraints have converged to place Iran at a critical crossroads. Here repression risks deepening instability, and reform coupled with global re-engagement remains the only viable exit.

Why in the News?

Iran is facing its largest nationwide protests since the 2022-23 Mahsa Amini unrest, triggered initially by a strike by Tehran shopkeepers on December 28 against the sharp collapse of the Iranian rial. What makes this moment significant is the convergence of economic freefall, post-war vulnerability, and overt foreign signalling, including claims by Israel’s Mossad of field-level presence and explicit U.S. threats of force. At least 12 protest-related deaths have been reported within a week, underscoring the scale and volatility of the crisis.

Introduction

Iran’s current unrest is not an episodic protest cycle but a manifestation of structural economic decay and political rigidity. The collapse of the rial, runaway food inflation, declining oil revenues, and daily power outages have eroded regime legitimacy. While President Masoud Pezeshkian has signalled limited social relaxation, especially on morality policing, his administration remains constrained on economic reform and national security. The state’s reliance on repression and attribution of unrest to foreign interference risks aggravating an already combustible situation.

What triggered the current wave of protests?

1. Currency Collapse: Sharp fall in the Iranian rial since the June 2025 war directly affected traders and households, triggering the initial strike.
2. Economic Shock Transmission: Trader unrest rapidly expanded into nationwide protests, indicating deep-rooted economic distress beyond urban commercial classes.
3. Continuity with Past Unrest: Represents the largest mobilization since the Mahsa Amini-led protests of 2022-23, signalling unresolved grievances.

How severe is Iran’s current economic crisis?

1. Food Inflation: Reached 64% in October, the second highest globally after South Sudan, indicating acute cost-of-living stress.
2. Currency Devaluation: Rial has lost 60% of its value since the June 2025 war, eroding savings and purchasing power.
3. Oil Export Decline: 2025 oil exports fell by ~7% compared to the 2024 average, tightening fiscal space.
4. Energy Shortages: Daily power outages have become routine, reflecting infrastructure stress and governance failure.

How is post-war geopolitics amplifying domestic instability?

1. War Aftermath: The unrest comes six months after a 12-day Iran-Israel war, which already strained Iran’s economy and security apparatus.
2. Israeli Signalling: Mossad publicly claimed operational presence “in the field” with protesters, intensifying regime paranoia.
3. U.S. Threat Posture: U.S. President Donald Trump warned on January 2 that the U.S. was “locked and loaded” to use force if protesters were killed.
4. External Pressure Effect: Foreign threats have reinforced regime defensiveness while worsening civilian suffering.

How is the Iranian state responding internally?

1. Repression: Security warnings against “rioters” and reported deaths indicate reliance on coercive control.
2. Limited Social Relaxation: President Pezeshkian has relaxed morality police enforcement, signalling tactical social easing.
3. Economic Paralysis: The President admitted in December that the government was “stuck” and incapable of performing “miracles”.
4. Blame Externalisation: Default regime response continues to attribute crises to foreign interference.

Why is repression proving counterproductive?

1. Cycle of Crisis: Economic deterioration combined with repression is reinforcing instability rather than restoring order.
2. Public Anger Reservoir: Years of shrinking economic opportunity and erosion of political and personal freedoms have accumulated latent discontent.
3. Ideological Fatigue: Religion and nationalism are no longer sufficient buffers against economic hardship.
4. Legitimacy Erosion: Persistent hardship weakens the regime’s social contract and coercive credibility.

What path does the editorial suggest forward?

1. Domestic Reform: Calls for tackling corruption and initiating meaningful economic reform.
2. Empowering Moderates: Urges external actors to engage and empower President Pezeshkian, not undermine him.
3. Re-engagement with the World: Emphasises that isolation and coercion deepen instability.
4. Strategic Restraint: Warns against threats issued on Israel’s behalf, which harden regime paranoia.

Value Addition: Regional and Global Political Impact of Iran’s Imbroglio

Impact on the Middle East

1. Regional Power Balance: Weakens Iran’s capacity to project influence across Iraq, Syria, Lebanon, and Yemen, altering the regional balance vis-à-vis Israel and Gulf Arab states.
2. Proxy Network Stress: Economic strain constrains Iran’s ability to sustain allied non-state actors, increasing volatility and fragmentation within proxy theatres.
3. Escalation Risks: External pressure combined with internal unrest raises incentives for diversionary foreign policy actions, heightening conflict risks in the Gulf and Levant.
4. Israel-Iran Confrontation: Mossad’s public signalling and Iran’s internal vulnerability increase the likelihood of covert and overt escalatory cycles.
5. Gulf Security Architecture: Reinforces security anxieties among Gulf Cooperation Council states, accelerating defence alignment and external security dependence.

Impact on India

1. Energy Security: Iran’s instability and sanctions-related disruptions affect global oil supply dynamics, exposing India to price volatility and import uncertainty.
2. Connectivity Projects: Political instability undermines strategic projects such as Chabahar port, affecting India’s access to Afghanistan and Central Asia.
3. Strategic Autonomy: Intensified U.S.-Iran tensions constrain India’s diplomatic space, complicating balanced engagement with West Asia, Israel, and the U.S.
4. Diaspora and Trade: Regional instability increases risks for Indian diaspora, remittances, and trade flows across the Gulf region.
5. Regional Stability Interest: Sustained unrest weakens India’s vision of a stable West Asia essential for economic and maritime security.

Impact on the Global Order

1. Sanctions Fatigue: Highlights the limits of coercive economic tools, demonstrating how prolonged sanctions can erode civilian welfare without political moderation.
2. Norms of Intervention: U.S. threats of force linked to internal unrest blur lines between humanitarian concern and strategic coercion.
3. Energy Markets: Iran-related instability contributes to structural volatility in global energy markets, affecting inflation and growth worldwide.
4. Multipolar Contestation: Iran’s crisis becomes another arena for great-power signalling, deepening geopolitical fragmentation.
5. Authoritarian Resilience Debate: Raises questions about the sustainability of repression-led governance under prolonged economic stress.

Conclusion

Iran’s current unrest reflects a convergence of economic collapse, governance rigidity, and external pressure. Continued reliance on repression and isolation risks deepening internal instability and regional spillovers. Sustainable stability lies in economic reform, political accommodation, and calibrated international re-engagement rather than coercive containment.