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Last Updated : Aug 20, 2018 01:03 PM IST | Source: Moneycontrol.com

US sanctions on Iran: India currently staring at a big conundrum

Iran and India have a long history of trade relations; India has made strategic investments in Iran to push Pakistan away and also to keep a stronghold on Afghanistan. Iran is the second highest exporter of crude to India second only to Iraq.

Moneycontrol Contributor @moneycontrolcom

Abhishek Bansal

ABans Commodities

US has been pursuing world economies to downgrade their trade relations with Iran and India is no exception to it. India started improving its trade relationships with Iran during 2016 after the Obama administration withdrew sanctions against Iran, albeit there has been a shift in policy again as President Trump decides to isolate Iran from the world trade map.

In May 2018, President Trump announced that his administration was withdrawing from the “defective” nuclear deal agreed among Iran and six other world powers. In July 2015, an agreement was concluded among Iran, China, US and other European countries to limit Iran's nuclear activities, in exchange for reduced sanctions.

According to the agreement called Joint Comprehensive Plan Of Action, the President of the United States would certify that Iran would adhere to the terms of the agreement every 90 days. On October 13, 2017, President Trump announced that the US would not make the certification and on April 30, 2018, the United States and Israel stated that Iran did not disclose a past covert nuclear weapons program to the International Atomic Energy Agency which was required in the deal.

President Trump also issued a warning stating "anyone doing business with Iran will not be doing business with the United States."

Trump’s immediate aim is to target Iran’s energy, petrochemical and financial sectors. In the first tranche on August 6, the US prohibited Iran's purchase of US dollars and precious metals, part of a larger move that attempts to cut the country off from the international financial system.

A second tranche of US sanctions on Iran's oil and gas sector are set to go into effect from November 4. The Trump administration forecasts that it will persuade countries to cut Iranian oil imports by as much as 1 million barrels a day when it is bringing-back energy sanctions in early November.

The US persuaded its staunch allies, including Japan and South Korea, to cut back on imports, however it has had more trouble with countries such as China and India, which account for more than 60 percent of Iran’s oil exports.

A Trump administration decision to withdraw from the Iran nuclear deal will test India’s foreign policy as well as the US-India relations. Iran and India have a long history of trade relations; India has made strategic investments in Iran to push Pakistan away and also to keep a stronghold on Afghanistan. Iran is the second highest exporter of crude to India second only to Iraq.

As the US is itself an ally, India finds itself in a tough spot — it may be forced to sacrifice domestic interests in the wake of the sanctions. India may be willing to replace Iranian oil with Saudi and/or US oil, even though it does not support the Trump administration’s decision to re-impose sanctions against Iran. If regional politics were to play a decisive role, Iran is significantly more important to India vis-a-vis the US.

Further, from a strategic perspective, India seeks to counter the growing Chinese influence across Asia. The Chabahar port development assumes significant importance in this regard. If India plans to minimize relations, then Iran could potentially offer the port project to China, which would be construed as a big negative for India. India can replace other countries for oil imports but it definitely cannot replace the geopolitical importance of Iran.

It is noteworthy that economic relationships between India & Iran in terms of quantum of trade are quite significant. To drive home this point, India imports nearly 81 million barrels of crude oil per day (bpd), out of which 15 percent is from Iran alone, and non-oil trade with Iran stood near USD 2,690 million out of the total figure of USD 12,890 million in the year 2016 -17 which accounted for nearly 20 percent of total trade.

India has also committed about USD 85 million to Chabahar development with plans for a total of USD 500 million on the port, while a railway line to Afghanistan from this port could cost as much as USD 1,600 million. Given that China has already rejected the US request to curb its trade relations with Iran, we can expect India’s reach to Iran to weaken against China if India complies to US sanction.

Apparently China National Petroleum Corp is taking the advantage to its favor and is expected to take the lead on a USD 5,000 million project to develop Iran’s share of the world’s biggest gas deposit, taking over from France’s Total SA.

In detail, Indian oil imports from Iran averaged nearly 0.62mbd from Iran and 0.77mbd and 0.93mbd from Saudi Arabia and Iraq respectively. This indicates India’s considerable dependence on Iranian oil and If India were to replace Iran with countries like Saudi Arabia, Russia, Iraq, US and others for 10% of its oil demand, it may have to revert to dollar-denominated imports, which will consequently result in a higher Current Account Deficit (CAD).

India gets cost effective crude from Iran as the country saves on shipping costs and Iran offers the longest credit period. Iran is also an important trade partner which imports $503 million rice apart from tea, nuts and spices, totaling USD 2,410 million of goods.

As crude oil replacement no doubt, Indian refineries can use US Sweet crude instead of Iranian oil but companies like Essar Oil which buy 40 percent of its crude from Iran, now face uncertainty as US may not provide the same incentives that Iran does, such as free shipping, insurance and an extended credit period.

Nikki Haley, US Ambassador to United Nations, met Indian Prime Minister Narendra Modi in July 2018 to explore opportunities to curb Indian imports from Iran, but was politely told that it would be difficult to do so.

However, India may cut its imports from Iran by 50 percent to secure a waiver from the US to continue its shipments and India has already expressed to the US its inability to scrap oil imports from Iran completely as its alternate supplies are being offered at competitive rates.

Among others, Turkey, India, China and the EU states are seeking waivers or ways around the energy-related sanctions — including alternative payment mechanisms. China and Turkey have clearly indicated at not complying with US energy sanctions.

Impact of US sanctions are already evident in recent crude import arrangements for India. Indian Oil Corporation, which is the state run oil company in India, and had been buying US crude in the spot market, also signed a term tender to purchase American oil for delivery every month between November and January.

Another Indian company owned by the government, HPCL, for the month of July, will take 0.084 million bpd from Saudi Arabia, more than double the 0.04 million bpd it normally buys under annual contracts. IOC bought a Very Large Crude Carrier (VLCC) cargo that will be delivered in October. It will deliver 1.6 million barrels of US Mars Crude and 0.4 million barrels of Western Canadian select for the first time.

Looking ahead, India needs to be determined to protect its business relations with both the US and Iran by restoring the sanctions. United States is effectively forcing its allies to go along with the penalties; subsequently, major Indian companies are under pressure to choose between tiny Iranian markets against vast American markets.

However, India should not compromise its national interests and maintain an independent foreign policy. Even US is on back-foot as Japan, South Korea along with China and India are forcing the US to consider sanction waivers to countries on a case-by-case basis. India is waiting for complete sanctions to kick off from November 4, 2018 and is also making arrangements to replace the affected Iranian crude import.

(Disclaimer: The author is founder and Chairman of ABans Group of Companies. The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions)
First Published on Aug 19, 2018 09:43 am
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