When a President of the most powerful country takes a sudden turnaround, it reverberates the world over. This is what has happened when President Donald Trump withdrew from the landmark Iran nuclear deal in May following months of speculation formally titled the “Joint Comprehensive Plan of Action” (JCOPA). The multilateral accord is aimed at limiting Tehran’s disputed nuclear programme in exchange for relief from international sanctions targeting Iran’s lucrative oil trade, India took a hit–forced to either slash its oil imports from Iran or risk exposure to U.S. sanctions.
With new sanctions set to take effect in November, when President Trump withdraws from JCOPA, it will compel a rethink on the quantum of oil imports from Iran by India and Indian companies. Any reduction will bite into the energy cooperation between the two countries. And this will strike at the very foundation of bilateral ties.
India is the world’s third largest oil consumer and is likely to become the largest by 2040. After China, India is Iran’s largest oil customer. India imported 27.2 million tons of crude worth of $11.1 billion between 2017 and 2018.
Sushma Swaraj, Minister for Foreign Affairs, put up a brave front and said India does not recognise any sanction except the ones imposed by the UN. India secured numerous sanctions waivers from Washington permitting the smaller oil purchases, but Iran’s share of India’s imports fell to less than 7 per cent. Although exports of Iranian oil to India surged by more than 110 per cent after sanctions were lifted following implementation of JCOPA in 2016, American withdrawal from the accord has found India back in a familiar position: forced to either slash its oil imports from Iran or risk exposure to U.S. sanctions.
It is noteworthy that Indian refiners have already begun to voluntarily reduce Iranian imports. On May 30, for example, Reliance Industries, owner of the world’s largest oil refining complex and chief purchaser of Iranian crude, announced it would cease oil imports from Iran in October or November as a result of the sanctions risk from the United States. In 2017, Reliance imported approximately 67,000 barrels per day (bpd) of crude from Iran. These imports increased to 96,000 bpd during the first quarter of 2018. With India currently importing 604,000 bpd from Iran, Reliance’s decision will reduce Iran’s exports to India by more than 15 per cent alone. The question that arises is whether India’s other major private and state-owned refiners, including Essar Oil, Indian Oil and HPCL-Mittal Energy Ltd., will follow suit.
Furthermore, refiners seeking to maintain present crude import levels will now have to contend with global shipping and insurance companies increasingly unwilling to engage in Iran-related transactions because of the looming sanctions risk. Without tankers to transport the oil and coverage to insure the cargo, oil trade will inevitably suffer. The value of rupee has fallen and pumps across the country are serving petrol at higher prices.
Besides, payment for crude imports will resurface as a serious obstacle for both countries. Without access to the U.S. financial system, India and Iran will have to devise workarounds to facilitate and preserve their commerce in oil. Although Iranian crude exports to India continued after 2012 at reduced levels, New Delhi was forced to pay for them through a complex combination of euros, rupees and barter system. Resurrecting a similar arrangement will be a formidable task, especially given that several Indian banks have already instructed their commercial clients to complete their financial transactions with Iran before sanctions take effect.
Moreover, some immediate consequences of President Trump’s decision to pull out from the Iran deal have already begun reverberating in India. News of the withdrawal was followed by the rupee’s weakening against the dollar, increased foreign exchange outflows and higher gas prices at pumps across India because of higher oil import bills.
US sanctions on Iran have made the situation worse for India, as oil imports from Tehran are going to become more complicated and difficult. Though these sanctions have opened up a small window of opportunity for India to step up bilateral trade as Iran being in Joint Comprehensive Plan of Action (JCPOA) between Iran and five UN permanent members and Germany. The five permanent UN members are US, Russia, Britain, France and China. traditionally friendly country and an Asian neighbour, one would be “too naïve” to think New Delhi could step up exports, HDFC chief economist Abheek Barua told DNA Money. “Unlike last time, it (the sanction) is very complicated this time,” Barua said, emphasizing it has come at a time when there is a full-blown trade war between US and China.
India imports a little over $100 billion worth of crude oil accounting for nearly 80 per cent of its oil needs. So, any sanction on any of the oil importing countries will be disruptive for the Indian economy. The volatility in the exchange rate of rupee is an indication that all is not well with the global economic situation with trade war worsening. Hardly a few weeks old, US sanctions on Iran have started hurting India as freight for Iranian oil has started increasing because many of the foreign shippers are reluctant to carry Iranian oil. But this has also thrown a new opportunity to get into shipping services in a big way that will facilitate not only Iranian oil imports but also trade from elsewhere. A former senior economist in the finance ministry, H A C Prasad, who has published papers on how to step up merchandise and services exports, said that shipping is one of the services, which had huge potential to expand. Indian shipping liners carried hardly 10 per cent of its total trade. Though Indian shipping was opened to foreign direct investment (FDI) as early as 2002, not much investment has poured in for want of shipping reforms, including changes in archaic shipping laws.
Lately, shipping has become one of the focus areas of reforms under Prime Minister Narendra Modi. This is however not a short-term opportunity. India is already looking at seeking exemptions from Washington to buy Iranian oil apart from working out alternative payment mechanism to protect India-Iran trade, which is $12-13 billion annually. The terms of trade are heavily loaded in favour of Iran. India imports close to $9 billion worth of oil from Iran. India exports around $3 billion worth of goods to Iran, which is mostly basmati rice, drugs, chemicals and engineering goods. During the previous sanctions on Iran, India was allowed to make part payment to Iran in rupees under a sort of barter deal. Indian refiners used to route all their oil payments through SBI and a German-based bank. India was allowed to make up to 45 per cent of its trade in euro and 55 per cent in rupees.
Sushma Swaraj has already indicated India will continue trading with Iran and Venezuela despite US sanctions against the two countries, asserting that it only recognises UN restrictions and not country-specific sanctions. This does not make the situation any better for India with the trade war becoming nearly full blown.
India was one of the few countries that continued to buy Iranian oil, although it had to reduce imports as shipping, insurance and banking channels were choked due to the European and US sanctions. One of the analysts in this sector said this time the situation is different. “You have India, China and Europe on one side, and US on the other… At this moment we really don’t know what to do, but at the same time, we have to prepare ourselves to face any eventuality,” said this person. While a US State Department official has said that Washington wants Iranian oil buyers to halt imports from November, US Ambassador to the United Nations Nikki Haley has told Prime Minister Narendra Modi to lessen dependence on Iranian oil. Haley spoke with US Secretary of State Mike Pompeo recently before meeting Modi. The US push to curb countries’ imports of Iranian oil comes after President Donald Trump withdrew from a 2015 deal between Iran and six world powers and ordered a reimposition of sanctions on Tehran. Some sanctions take effect after a 90-day “wind-down” period ending on 6 August, and the rest, notably in the petroleum sector, following a 180-day “wind-down period” ending on 4 November.
Output boost from OPEC
Under pressure from the US sanctions, Reliance Industries Ltd, the operator of the world’s biggest refining complex, has decided to halt imports. Nayara Energy, an Indian company promoted by Russian oil major Rosneft, is also preparing to halt Iranian oil imports from November after a communication from the government, a source said. The company has already started cutting its oil imports from this month. Indian Oil Corp. Ltd, Mangalore Refineries and Petrochemicals Ltd and Nayara Energy, the top three
Indian buyers of Iranian oil, and the oil ministry did not respond to Reuters’s request for comments. Removing Iranian oil from the global market by November, as called for by the US, is impossible, an Iranian oil official told the semi-official Tasnim news agency recently. The options to find replacements to Iranian oil have widened after OPEC agreed with Russia and other oil-producing allies recently to raise output from July by about 1 million bpd, with
Saudi Arabia pledging a “measurable” supply boost but giving no specific numbers. Saudi Arabia’s plans to pump up to 11 million barrels of oil per day (bpd) in July would mark a new record, an industry source familiar with Saudi oil production plans told Reuters recently. The second source said there were plenty of options available in the market to replace Iranian oil. “There are companies and traders that are willing to give you a 60-day credit, crude is available in the market,” the source said.
By Vijay Dutt