Iran oil imports put India in a tough spot The Statesman 30 Apr 19
Iran oil imports put India in a tough spot 30 Apr 19
The US announced its withdrawal from the Iran nuclear deal in May 18. The deal, also termed as the Joint Comprehensive Plan of Action, was signed in Jul 15 between the five permanent members of the UNSC and Germany on one side and Iran on the other. The US re-imposed all earlier lifted sanctions on Iran in Nov last year. As per Trump, this was the ‘worst deal ever’. While China, also a signatory to the deal had some reservations, mainly that the deal permitted Iran to develop weapons outside the agreement including ballistic missiles, it accepted the same.
All other members who initiated the deal were against US actions, attempted to bypass US sanctions and continue trading with Iran. They were hopeful that once the US presidency undergoes a change, the US would re-enter the deal. However, fearing US sanctions, many European companies stopped dealing with Iran including purchasing its oil. India joined nations in claiming that US sanctions were not UN sanctions and hence it would not adhere to them. The reality is now changing.
The main antagonists to the deal were Israel and Saudi Arabia, both sworn enemies of Iran. Both worked to convince the US that Iran was continuing its project of developing nuclear weapons despite agreeing to the contrary. Further they blamed Iran for supporting terrorist groups in the Middle East including in Syria and the Hezbollah in Lebanon. Recently the US stated that since re-imposition of sanctions, Iran has been unable to pay Hezbollah fighters, proving to the world that its sanctions are working.
The US is firm in its plan of seeking a regime change in Tehran and the easiest, non-costly and non-military option was to force an economic collapse by imposing sanctions. It is aware that a military option may not be easy and could fail. Iran still controls the Strait of Hormoz and could impact move of international oil. The main income for Iran flows from its export of oil and gas, hence targeting that is the first step.
Initially it gave eight nations, including China, India, South Korea and Japan six months to steadily reduce their purchase of Iranian oil. The period ends on 01 May 2019. Post this date there would be no waiver on purchase of oil. Specific to India, they have permitted it to continue developing the Chabahar port, which would not be within the purview of sanctions.
To further impress on India, the US has stated that it is supporting India in its attempts to list Masood Azar as a global terrorist, Indian entry into the NSG and in its isolation actions against Pakistan. Hence, it expects India to comply with its demands. The US state department official Alice Wells was in India last week to discuss this with Indian officials.
US’s attempts to control oil prices and enhance production to meet the demands of world oil, without oil from Iran has met with partial success. India is one of the nation’s which would face difficulties. India is the world’s third largest oil importer, imports 80% of its oil and 40% of its natural gas needs. India is also Iran’s second largest importer of oil after China.
Indian refineries have steadily reduced their dependency on Iranian oil, however, may not be able to stop it altogether. India has for the first time even commenced purchasing US oil, seeking to expand its procurement base. With sanctions also imposed on Venezuela and most of Libyan oil not being available due to the ongoing civil war, the market to procure oil is smaller.
Iranian oil comes with options which few suppliers can meet. These include free shipping, insurance and a 60-day credit period. With OPEC imposing a cut in production to enhance oil prices, adopting US sanctions would enhance oil prices by almost 35%. Thus, the new government will be forced to increase oil prices as soon as it comes to power. It will also impact the value of the Rupee and enhance inflation.
Are there options for India? It is evident that the US is unwilling to back down. It is pushing hard and would have to act against even allies if they do not adhere to its demands. Thus, India may shift to a Rupee payment model, which may work for a limited number of barrels per day, not at the figure India imports at present. During earlier sanctions, India imported 100,000 barrels a day on Rupee terms from Iran.
India is also concerned with its weapon purchases from Russia including the S 400 missile system. These are likely to come under CAATSA (Countering America’s Adversaries Through Sanctions Act) which could impact India. The US has been offering its own weapon systems as a replacement, but India is unwilling.
For India, if it stops purchase of weapons from Russia, it would push Russia into the Pak camp and enhance sale of Russian weapons to Pakistan. It would also impact Indo-Russian relations. India needs Russia to also control a belligerent China. Pak is already seeking to purchase arms worth USD 9 Billion from Russia. India would have to push the US to ignore CAATSA in a quid pro quo for accepting its demand for reducing purchase of Iranian oil.
India’s acceptance of US demand on Iran may be effective, provided all others follow suit. China has announced that it opposes US’s unilateral sanctions and is unwilling to adhere to it. In case India backs down and China continues, then it would lose the advantage it has in Iran.
With doors closing, India may have to toe the US line. If that happens and oil prices continue to rise, the Indian economy would be impacted, for which there are no options. Hence, in all probability India would bargain that if it reduces oil procurement from Iran, the US would have to accept Indian military purchases from Russia, without imposing CAATSA. Will the US agree remains the mute question.
About the Author
Maj Gen Harsha Kakkar
Retired Major General Indian Army