Early this week, US Secretary of State Mike Pompeo announced that the United States would not renew exemptions for waiver for importing oil from Iran. India, China and US’ allies Japan, South Korea and Turkey will be impacted the most by the non-renewal of waiver. The other three currently exempted countries, Italy, Greece and Taiwan, have reduced their imports to zero.
Since its withdrawal from the Iran nuclear deal, the Trump administration has been taking steps to economically and diplomatically isolate Iran. The exemptions were granted in November 2018 for a 180-day period for India and other countries. This is due to expire on May 02. That an announcement of such nature would be made by the United States was expected. India’s Ministry of External Affairs had stated that India ‘continues to engage with the United States administration’, indicating that the matter was being discussed. India had been in continuous talks with American officials and was working towards continuation of the waiver. While talks are continuing, India has also worked on alternatives to Iranian oil. The Ministry of Petroleum and Natural Gas has clarified that there are robust plans to ensure adequate supply of crude oil which may be sourced from other nations. Indian Oil Corporation (IOC) has said refiners import crude oil from a wide range of sources and had been lining up alternate supplies for the past months.
Saudi Arabia, UAE and other OPEC (Organization of Petroleum Exporting Countries) members have assured India that they would make up for the shortfall. Despite these assurances, international oil prices are rising. They are at a six month high. An increase in oil prices is going to put pressure on India’s fiscal and current account deficits, and could add to inflation, as the high cost will be passed on to consumers. India is taking to its partners in West Asia for purchasing oil on similar terms as Iran. India is also pushing for annual contract terms which would be cost effective for India than under spot contracts.
India is the second largest buyer of Iranian oil after China and it accounts for 11 % of India’s oil imports, making Iran the third largest oil supplier to India after Iraq and Saudi Arabia. The terms of payment are favourable towards India in which New Delhi makes payments for the oil in Indian rupees in an escrow account in an Indian bank. The money is then used by Iran to purchase essential items like medicines and food stuff etc. While the United States has stated that Iran can continue to use the corpus amount in the account, India can no longer add to this amount. Indian officials have stated that there is little ‘clarity’ on the matter. India could also suffer as its refiners, are configured for the particular variety of Iranian crude oil.
If India violates the sanctions, then it would face secondary sanctions in which Indian companies and entities may be banned from using the international SWIFT (banking transfer) system and may have to forfeit some assets in the United States etc. For this reason, Indian companies have refrained from engaging with Iran.
Apart from energy supply, India-Iran relations are also at stake. Iran offers India vital access to Afghanistan and Central Asia, which is blocked by Pakistan. The Chabahar port projects will not be affected by the sanctions; but while the project is of significance to India, Iran may reduce its interest. Chinese officials have stated that China is consistently opposed ‘unilateral sanctions by the United States’. Turkey has also stated that it rejects these sanctions. India is taking a milder step as it appreciates the United States efforts to accommodate India’s concerns vis-a- vis Pakistan supported terrorism.
While there are differences between India and Iran on a few issues, India has maintained its steady relations with both the United States and Iran.
Script: Dr. Stuti Banerjee, Strategic Analyst On American Affairs