When U.S. Sanctions Reach Beyond the Bilateral Relationship

A country does not have to trade with the United States to feel the force of American sanctions.

India can buy oil from Russia, develop a port in Iran, build connectivity through Central Asia, or explore alternatives to dollar-based payments. These activities are not, in themselves, bilateral India–U.S. trade disputes. Yet decisions taken in Washington can alter their cost, feasibility or even viability.

This creates a distinctive form of power. The United States does not always need to prohibit India from pursuing a particular relationship directly. It can change the risks surrounding India’s dealings with third countries. Indian companies may face compliance concerns, infrastructure projects may require waivers, energy purchases may become politically costly, and financial arrangements may become harder to operate.

India retains the ability to make independent choices. The constraint is that some choices become more expensive, uncertain or difficult to sustain. Understanding this distinction is essential to understanding the relationship between sanctions and strategic autonomy.

1. The power of a sanction does not stop at the target

Sanctions are commonly understood as restrictions imposed on a particular country or entity. Their effects, however, can travel through a wider network of commercial and financial relationships.

An Indian company considering business with Iran must look beyond whether India and Iran permit the transaction. It may also need to assess its exposure to U.S. sanctions. The U.S. Treasury’s Office of Foreign Assets Control (OFAC) administers sanctions programmes and publishes the regulations, designations and guidance relevant to determining which activities are permitted.

OFAC’s Iran sanctions programme illustrates the complexity of this framework. It includes restrictions arising from different laws and executive orders, alongside authorisations that permit specified activities under defined conditions. These authorisations, often called general licences, do not remove the broader sanctions regime. They allow only the activities covered by their terms.

The legal position therefore depends on the particular transaction. A direct prohibition, a requirement for authorisation, potential exposure to secondary sanctions and a bank’s decision to avoid a risky transaction are not the same thing. Yet each can affect whether a business proceeds.

This distinction matters because the commercial effect of sanctions can extend beyond the activities that are directly prohibited. A company may decide not to proceed because the legal position is uncertain, because its bank is unwilling to process the payment, or because the potential consequences outweigh the expected return.

The same mechanism can influence India’s energy purchases and other commercial relationships. The chain is straightforward:

U.S. sanctions or the threat of sanctions → compliance risk → Indian commercial or state adaptation → altered choices involving third countries.

Washington does not have to control India’s relationship with Russia or Iran directly. It can influence the conditions under which those relationships operate.

2. Chabahar shows how this works in practice

India’s experience with Chabahar illustrates how sanctions can shape a strategic project without necessarily ending it.

The port was never simply an Iranian infrastructure project. For India, it offered a route towards Afghanistan and Central Asia that avoided dependence on transit through Pakistan. It also formed part of India’s wider ambition to improve connectivity with Eurasia.

India’s involvement deepened after the 2015 nuclear agreement with Iran. However, the U.S. sanctions regime repeatedly complicated the project.

In 2018, Washington granted an exception for certain Chabahar-related activities connected with Afghanistan’s reconstruction and economic development. This allowed India to pursue parts of the project despite the wider restrictions on Iran.

The exception was strategically important, but it also created a vulnerability. India’s ability to continue operating in Chabahar became partly dependent on the scope and duration of an authorisation issued by Washington. A waiver can provide room to operate, but it does not eliminate the underlying sanctions framework.

The risks became visible in 2019, when sanctions-related uncertainty disrupted India’s plans to supply railway equipment for an associated project in Iran. India was subsequently removed from that railway project. The episode demonstrated how uncertainty surrounding sanctions could affect a wider connectivity plan, even when the strategic objective remained important to India.

India nevertheless continued with Chabahar. On May 13, 2024, India Ports Global Limited signed a ten-year contract with Iran’s Ports and Maritime Organisation to equip and operate the Shahid Beheshti terminal. The agreement involved a financial commitment of $120 million.

India’s Ministry of External Affairs has explained that Chabahar was conceived to support Afghanistan’s reconstruction and economic development and to strengthen India’s trade and economic links with Central Asia. The port also forms part of the broader International North–South Transport Corridor, which is intended to connect India with Iran, Russia and other Eurasian markets.

The project therefore had strategic value beyond its immediate commercial returns. It gave India a potential route towards Afghanistan and Central Asia without relying on Pakistan for transit.

But the sanctions uncertainty returned.

In September 2025, the United States revoked the earlier sanctions exception. Following discussions with Washington, India obtained conditional protection for port-related activities until April 26, 2026. The extension gave India additional time, but it did not provide a permanent solution.

Bloomberg reported on April 24, 2026, that India was considering several options for its stake in Chabahar ahead of the waiver’s expiry. According to officials familiar with the discussions, one possibility was to transfer the stake temporarily to an Iranian entity. Bloomberg also reported that India was holding separate discussions with Washington and Tehran and did not intend to abandon the port permanently, given its plans for future connectivity.

The proposed transfer was an option under consideration, not a confirmed final decision at the time of Bloomberg’s report.

The subsequent official position also requires a distinction between India’s financial commitment and its future operational role. In August 2026, the Indian government reiterated that it had fulfilled the $120 million commitment, with the final tranche transferred in August 2025. It also confirmed that the conditional U.S. sanctions waiver had ended on April 26, 2026, and that India remained engaged with the relevant stakeholders to address the consequences.

Foreign Secretary Vikram Misri similarly said in September 2026 that India was continuing discussions with stakeholders to find a sustainable way forward for Chabahar.

These developments reveal the central problem. India has completed its stated financial commitment, but the expiry of the waiver has complicated the conditions under which the project can continue.

The issue is not simply whether India wants to operate a port in Iran. It is whether India can preserve its strategic interests there without exposing its entities and wider commercial ambitions to unacceptable sanctions risks.

Chabahar demonstrates how sanctions can change the structure of a country’s involvement in a third country—even when they do not eliminate its strategic interest in that relationship.

3. Russian oil reveals a different form of pressure

Chabahar concerns infrastructure and connectivity. Russian oil demonstrates how sanctions-related pressure can extend into a country’s fundamental economic requirements.

India’s relationship with Russian oil changed dramatically after Russia’s invasion of Ukraine in February 2022. Before the war, Russian crude accounted for approximately 1% of India’s oil imports. By 2024, Russia accounted for around 40%.

The shift reflected commercial considerations, including the availability of discounted Russian crude and India’s interest in diversifying its energy supplies. It also brought India’s energy choices into closer contact with U.S. foreign policy.

In August 2025, the Trump administration imposed an additional 25% duty on Indian goods in response to India’s purchases of Russian oil. The U.S. executive order explicitly connected the additional duty to India’s continued direct or indirect importation of Russian Federation oil.

This was a different mechanism from the sanctions uncertainty surrounding Chabahar. In the oil case, Washington used the prospect of higher costs for Indian exports to influence India’s relationship with a third country.

The consequences were potentially significant. India could continue buying Russian oil, but doing so now carried an additional risk for its exports to the American market. The decision was no longer only about the price and availability of crude. It also involved the cost of a wider trade relationship.

The pressure did not, however, remain unchanged. In an executive order dated February 6, 2026, the White House terminated the additional 25% duty effective February 7. The order stated that India had committed to stop importing Russian oil and to purchase U.S. energy products. That statement records the U.S. administration’s stated basis for the change; it should not be treated, by itself, as independent proof that all Russian oil purchases had stopped.

Import data also shows why changes in oil flows need to be interpreted carefully. Reuters reported on February 4, 2026, that India’s Russian crude imports had fallen to approximately 1.215 million barrels per day in January, around 12% below December’s level. The report placed the decline amid U.S.–India trade negotiations and Western sanctions.

That data supports the observation that Russian oil imports had declined. It does not establish that U.S. pressure was the sole cause. Commercial pricing, availability, refinery requirements and other market conditions can also affect import volumes.

The broader point remains important. A country’s decision involving one trading partner can become more expensive because of its economic relationship with another.

India’s original decision concerned its energy supply. Once U.S. trade penalties entered the picture, the consequences for access to the American market became another consideration. The pressure operated through the relationship between two different economic relationships rather than through a simple prohibition on India’s purchase of Russian oil.

4. But India does not always comply

Sanctions do not automatically determine Indian policy. India’s purchase of the Russian S-400 air defence system illustrates the limits of external pressure.

India proceeded with the purchase despite the threat posed by the Countering America’s Adversaries Through Sanctions Act, commonly known as CAATSA. The legislation provides a framework for sanctions concerning specified activities involving Russia, Iran and North Korea.

The possibility of U.S. penalties generated debate because India regarded the S-400 system as strategically important. Yet the United States did not impose CAATSA penalties on India over the purchase during the period covered by the Congressional Research Service’s assessment.

A Congressional Research Service report on India–Russia relations stated: “The Administration has yet to make a determination on CAATSA sanctions in India’s case.”

That statement is significant because it distinguishes the existence of a sanctions threat from an actual decision to impose penalties. A law can create the possibility of sanctions without ensuring that sanctions will be imposed in every case.

The absence of a penalty at a particular point in time also does not establish a permanent exemption. The applicable statutory provisions, any waiver authority and the government’s actual decision must be considered separately.

India’s decision to proceed with the S-400 purchase demonstrates that it can sometimes accept the risk of disagreement with Washington when it considers the strategic value of an activity sufficiently important.

This does not mean that sanctions are irrelevant. It means their effects depend on the circumstances.

A government may change its behaviour when the economic cost becomes too high. It may seek an alternative arrangement when the strategic objective remains important. Or it may proceed despite the pressure when the perceived security benefits outweigh the risks.

Sanctions create incentives and constraints; they do not guarantee obedience.

5. The real constraint is the cost of choosing

Strategic autonomy is often discussed as if it means complete freedom from external influence. In practice, no major economy operates that way.

India is deeply connected to international markets, financial institutions, energy suppliers and trading partners. These connections create opportunities, but they also provide channels through which external policy can affect domestic decisions.

Consider the three examples discussed above.

India can continue buying Russian oil. If doing so creates the possibility of higher tariffs on Indian exports, however, the economic cost changes.

India can pursue Chabahar. If the project’s operating environment depends on a sanctions waiver that may expire, its commercial and political risks change.

India can deepen economic ties with Iran. Yet companies, banks and investors concerned about sanctions exposure may find those relationships more difficult to sustain.

In each case, the choice remains formally available, but its consequences change.

This is why the concept of strategic autonomy cannot be measured only by whether a country is legally or politically free to make a decision. It must also account for the economic and strategic costs attached to that decision.

The power lies partly in changing the price of autonomy.

A country may retain the right to pursue a policy while finding that policy increasingly expensive. It may then modify its approach—not necessarily because it has abandoned its strategic objective, but because the conditions for pursuing it have changed.

6. The financial system makes the reach wider

Sanctions extend beyond individual transactions because U.S. policy operates within a wider financial and commercial system.

Banks, insurers, investors and other counterparties may respond to sanctions exposure even when they are not direct targets of American foreign policy. They must assess whether a transaction creates legal, regulatory or commercial risks for their own operations.

This can influence decisions well beyond the original target of a sanction. A bank may be unwilling to process a payment. An insurer may be reluctant to cover a shipment. A company may avoid a project because it cannot be certain that the necessary financial services will remain available.

Such decisions do not all represent the same legal obligation. Some may be required by sanctions rules; others may reflect an institution’s own assessment of risk. Nevertheless, they can produce a similar practical result: a transaction becomes harder to execute.

This helps explain India’s interest in alternative payment arrangements, including rupee-based settlement. Such arrangements can diversify the ways in which trade is conducted and may reduce reliance on particular channels.

But an alternative payment mechanism does not automatically eliminate exposure to the dollar-centred financial system or to U.S. sanctions. Its practical value depends on the transaction, the parties involved, the applicable rules and whether the necessary banking and commercial infrastructure exists.

A payment route may be available on paper without substantially changing the risks faced by the businesses expected to use it. Companies still need counterparties willing to trade, financial institutions willing to process payments and arrangements that comply with the rules applicable to them.

Strategic autonomy therefore depends partly on building workable alternatives, not merely announcing them.

The broader lesson is that economic power does not operate only through formal restrictions. It can also operate through the choices made by institutions that want to avoid legal uncertainty or commercial losses.

7. Sanctions can reshape policy without dictating it

India’s experience sits between two misleading conclusions: that the United States controls Indian foreign policy, and that sanctions are irrelevant because India can sometimes resist them.

Neither conclusion captures the full picture.

Sanctions can make one option more expensive than another, delay infrastructure, create uncertainty for companies and encourage governments to redesign projects. They can make relationships with third countries harder to sustain, but they do not automatically determine the final decision.

India’s response depends on its priorities, the alternatives available and the economic or strategic costs it is prepared to absorb.

Chabahar, Russian oil and the S-400 purchase do not tell exactly the same story. Chabahar shows how uncertainty over sanctions can force a government to reconsider the structure of its involvement in a strategic project. Russian oil shows how the threat of economic penalties can alter the calculations surrounding energy purchases. The S-400 case demonstrates that India may proceed with a strategically important decision despite the possibility of sanctions.

Together, these examples show that the effect of sanctions is not simply compliance or defiance. Governments can delay, negotiate, diversify, seek exemptions, redesign arrangements or accept certain costs.

The pattern is one of adaptation rather than automatic obedience.

That distinction is important for understanding India’s foreign policy. Strategic autonomy is not the absence of external pressure. It is the capacity to make choices while managing the pressure that follows.

8. The broader transformation

The most consequential effect of sanctions may occur outside the bilateral relationship itself.

A tariff affects the movement of goods between two countries. A sanction can influence how one country deals with a third. That difference expands the geographical reach of economic statecraft.

Iran becomes part of the India–U.S. relationship. Russia becomes part of it. Even India’s choices about payment systems can be affected—not because Washington directly controls those relationships, but because the economic costs of operating outside the preferences of the U.S. financial and commercial system can become significant.

The Chabahar case shows that this influence can reach infrastructure and regional connectivity. The Russian oil case shows that it can reach energy decisions and the terms of trade. The S-400 case shows that the pressure has limits when a government is prepared to accept the risk of disagreement.

These cases also show why it is important to distinguish between a sanctions rule, the threat of a penalty, a waiver and the actual decision to impose sanctions. Each has a different legal and practical effect. Treating them as interchangeable would exaggerate the reach of U.S. power in some cases and underestimate it in others.

The central argument is not that Washington can dictate every Indian decision. It is that U.S. policy can change the conditions under which India pursues its interests in other countries.

The power of sanctions lies not only in stopping a transaction. It lies in changing the cost of choices that the target country makes elsewhere.

For India, strategic autonomy cannot mean simply having the formal right to choose. It also depends on whether the country has built enough economic diversification, financial alternatives, energy options and strategic resilience to make those choices affordable.

When sanctions reach beyond the bilateral relationship, autonomy is measured not only by whether a country can say no, but by how much it must pay when it does