US Sanctions on Iran: How India Can Cushion Blow to its Economy
The US suddenly made an announcement on 22 April 2019, that it will end all Iran sanction waivers after 2 May 2019. These waivers were granted to eight countries for an initial period of 180 days, after the US had imposed sanctions against Iran’s oil export on 5 November 2018.
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This decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue.” As it stands now, five nations, i.e. Japan, South Korea, China , India and Turkey, will no longer be exempt from US sanctions if they continue to import oil from Iran. The remaining three, i.e. Italy, Greece and Taiwan, have already stopped importing oil from Iran.
A Hawkish Strategy
This US’s aggressive diplomatic posturing betrays the Trump administration’s exasperation. They have not been able to bring Iran to the negotiating table over 12 key demands they had listed last year. These include Iran accepting new limits on its nuclear program, ending its ballistic missile testing, and halting interference in the affairs of its neighbouring countries etc.
Iran not only remained dismissive but scoffed at the idea, refusing to engage with the US. It condemned the US sanctions as ‘illegal’, while its Islamic Revolutionary Guard Corps had threatened to block the Strait of Hormuz, a vital passageway for nearly one-third of the world’s crude and refined products. If at all this happens, the world might witness a repeat of the 1956 Suez Crisis and military conflict thereafter. What if Russia jumps into the fray from the Iranian side? It is scary to imagine that happening. Reducing its oil exports to zero would hit the Iranian economy hard, and can elicit an aggressive posture from Iran as well.
‘Idealism vs Materialism’
The US, with their materialistic and utilitarianism moorings, cannot believe that Iranians are pursuing a peaceful nuclear programme. Iran’s nuclear energy programme is tied to its national pride, and in the event of this plan failing or the diplomatic negotiation not leading to the settlement, guaranteeing the smooth execution of the programme, Iranian national honour will be affected. Moreover, Iran has a spiritual narrative on the whole discussion.
Dr Mohammad Reza Chitsazian from Isfahan University, Tehran, in his article An Iranian Perspective on Iran- US Relations: Idealist Versus Materialist, writes that “the rule of nafy-e-sabil, which is derived from a verse in the Holy Quran, expresses that Allah will, by no means, provide the unbelievers with a way over the believers. In the interpretation of this verse, it is cited that ‘way’ means to bring under domination, and if any diplomatic deal or agreement paves the way for the domination of non-Muslims over Muslims, it will be nullified and void. Given that peaceful nuclear energy is the right of all countries, recognised under the Non Proliferation Treaty, by suspending its development, the principle of nafy-e-sabil may be violated, as it may be considered as surrendering to the will of the domineering west.”
Will the US Succeed?
Iran has categorically stated that it does not contemplate any modifications to the nuclear deal it signed with the US, UK, Russia, France, China and Germany in 2015, which had ended years of stringent multilateral sanctions against Iran.
There is a remote chance that Tehran may agree to come to the negotiating table with America. But that may not immediately lead to any reversals on the waivers decision, and not mitigate the crisis.
The affected nations, because of the lifting of this waiver, would use their own diplomatic clout to dilute the effect, while Iran would try and retain its existing customers and find ways to organise payments and insurance for the oil shipments through other parties and intermediaries.
What it Means for India
India is the world’s third largest consumer of oil, with 85 percent of its crude oil and 34 percent of its natural gas requirements being fulfilled by imports. In 2016, India imported 21.5 million tonnes of crude oil, and at 13 percent, Iran stood third among India’s biggest oil suppliers, after Saudi Arabia and Iraq at 18 percent each.
India has a serious problem with the US decision on zero oil imports from Iran. It will have an adverse impact on the Indian economy and may lead to spiraling inflation. During the India-US 2+2 dialogue, the US had made it clear that it was not in its own interest to target the Indian economy. But the current announcement by the US contradicts that.
India was earlier asked to ensure “significant reductions” in oil imports, restricting its monthly purchase to 1.25 million tonnes or 15 million tonnes in a year, down from 22.6 million tonnes bought in 2017-18. Last November, US Secretary of State, Mike Pompeo, said that the US had agreed to exempt eight countries, as they had made “significant reductions” in oil imports. India was one of eight countries allowed temporary import of Iranian oil.
Iran has been exporting around 1.1 million barrels per day of crude, and 200-300,000 barrels per day of natural gas condensates to China, India, Japan, South Korea and Turkey, under the existing sanction waivers. India had continued to import oil from Iran even during the last set of sanctions between 2012 and 2015.
Alternate Choices for India
Saudi Arabia is ready to meet India’s need for additional oil supplies should the US sanctions on Iran hit energy imports. Iraq and Saudi Arabia are the top two suppliers of energy to India. Saudi Arabian ambassador Saud bin Mohammed al-Sati told a group of journalists: “We have been a consistent and reliable supplier of energy to India and other countries. We will always be there to meet any demand of our customers, including India.”
As an alternative, Venezuela wants to double its oil sales to India, and is open to barter payment arrangements. Venezuela buys medicines and other products from India, and is looking for alternative payment methods after the United States imposed stringent sanctions on Venezuela’s state oil firm – PDVSA – in a bid to push out President Nicolás Maduro. This is one option that India can consider.
The Iranian contracts were favourable in terms of them being free on board (FOB) basis, 60 day credit, and free insurance. India must use its good relations with Saudi Arabia, Kuwait and the United Arab Emirates (UAE) to source additional volumes at terms similar to those it had with Iran, to avert any sharp rise in its domestic oil prices. An increase in oil prices is likely to put pressure on India’s fiscal and current account deficits.
(The author is a member of AAP's think tank 'India Dialogue' and associate member of Institute of Defence Studies and Analyses (IDSA). He also works as a freelance writer and speaks on international, political and strategic affairs. He can be reached @rakeshsinha65. This is an opinion piece and the views expressed above are the author's own. The Quint neither endorses nor is responsible for them.)
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