Oil, S 400, CAATSA A Test of Diplomacy for India
There is never a dull moment in world politics. International relations are in a constant state of flux with many an extraneous factor causing shift in alliances, changes in priorities and even worse. The only ‘constant’ as immortalised by Lord Palmerston in his famous statement on international relations: “There are no permanent friends or permanent enemies, only permanent interests”. Each nation, in its own interest, plays one against the other, sometimes overtly, and sometimes covertly , thus influencing the geopolitical contours.
Three issues, as aforementioned in the title have been in the Indian media in the immediate recent past – the fourth being the acquisition of Rafale aircraft. The latter will not be discussed here, as it can be accommodated only in a full thesis! Rising oil prices have brought smiles to the faces of exporters of the commodity, but consuming nations, as India, will have to bear the increase in costs at the pump. In the signing of the agreement for the procurement of the S-400 missile system from Russia, India may not have ‘cocked a snook’ at USA, but it has definitely shown America that Indian interests are first priority. USA is threatening its friends and foes alike with the CAATSA- Countering America’s Adversaries through Sanctions Act – a new law passed last year. Whether India falls in to the category of adversaries on whom the Act will apply, will be revealed soon.
Oil is once again a source of anxiety, which is a bit of a surprise, considering that about five years ago prices in excess of $100 per barrel seemed to be a constant on the economic horizon. Nevertheless, in 2014, prices crashed as the American shale boom burst on the market, turning it on its head. The world welcomed the new base line for oil prices in which flexible shale-oil production in USA would keep oil prices under control. However, a robust economic growth boosted the demand for oil and pushed the prices northwards. This, coupled with supply constraints due to various reasons, has had an adverse effect on prices. Economic and political crises have drastically reduced Venezuela’s production capacity. The US withdrawal from the JCPOA – the formal name for the Iran Nuclear Agreement – and the anticipated sanctions on Iran that will become effective in another three weeks time on November 04, 2018, has already disrupted Iran’s oil production.
Not all oil shocks are the same. A jump in prices caused by a robust global growth is generally benign, while an interruption in supply is more disquieting. Rising prices in the mid-2000s were clearly a result of soaring demand. Most economies weathered the rising costs tolerably well until prices climbed to dizzying heights in 2007. But the cause of today’s run-up is murkier. OPEC and other oil-exporting nations, as Russia, came to a decision to curb their oil production, with the sole aim of boosting prices, which would, in turn, help repair their budgets and current account deficits. At a recent meeting in June, these nations decided not to respond to the higher prices by increasing supply, despite a ‘Trump threat’. With falling inventories, markets have now, very little cushion against an added price rise, should any further disruption in supply occur.
America’s place in oil markets has changed as a result of the shale revolution. The price collapse of 2014 might have been expected to deliver a substantial stimulus to the American economy, but it was not to be; the lower prices offset the benefits of cheap oil to consumers, resulting in a blow to the economy. Now, while the oil industry is relieved with the rising costs, the consumer is piqued.
Similarly, rising oil prices are a source of worry for the oil-importing economies, as India, as they do not have anything to fall back upon. When oil prices rise, oil-importing economies’ terms of trade deteriorate as the price of their imports rises relative to that of their exports. Since their exports pay for fewer imports, the importers’ current-account deficits widen, leading to their exchange rates to depreciate, facilitating an adjustment; these nations would then buy a bit less from the rest of the world than before, and try and sell the rest of the world a bit more. Whatever current-account deficits remained would be easy enough to finance, given bullish investors’ eagerness to lend to the fast-growing emerging world. During a more propitious moment, this would not be cause for great concern.
This, however, is not that sort of a moment. Manufacturing export orders flipped from growth to contraction over the summer. As trade growth slowed, the adjustment that oil importers made to higher oil prices became more severe. India’s current-account deficit has continues to grow, for instance, even as the rupee plumbs record lows against the dollar, further exacerbating the dollar debts, which then increases pressure on the already harassed economy.
During the summit visit of President Putin to New Delhi, India and Russia formally inked the deal for $5.2 billion, despite a threat of sanctions from USA. Post the agreement, President Trump has sent out an ominous warning that India will find out “sooner than you think” about the US reaction to the deal. Whatever the threats, the deal with Russia has made it clear that India-Russia relations continue to be on a sound-footing.
The S-400 is one of the world’s most advanced long-range air defence systems, capable of destroying cruise, ballistic missiles and can engage almost every type of modern aircraft. Advanced jet fighters with stealth capabilities, such as the F-35 of USA, will also find it difficult to operate in an airspace where the S-400 is deployed. In the words of the Chief of IAF, the acquisition of the S-400 would be like a “booster shot” for the Indian Air Force. India needs to be well-equipped against neighbouring threats; Pakistan has over 20 fighter squadrons, with upgraded F-16s, and is inducting the advanced J-17 aircraft from China in large numbers. China, on the other hand, reportedly has 1700 fighters, including 800 4th-Gen fighters; hence the acquisition.
China was the first nation to buy the S-400 missile system in 2014 and has already taken deliveries of an undisclosed number of the missile system; last year Russia signed a contract with Turkey, and is also negotiating with Qatar to sell the missile system. While China has already been placed under sanctions from the US, under CAATSA, for having made defence purchases from Russia, India is under threat.
The Act is a US Federal Law that imposes sanctions on US adversaries; Iran, North Korea, and Russia are on the list as adversaries and any interaction with these nations, deemed beneficial to them by USA, would invite sanctions. The bill was passed with an overwhelming majority, 98-2, by the US Senate and signed as a law on August 02, 2017, by President Trump, who also issued two simultaneous statements that he believed the legislation was “seriously flawed”! China was put under US sanctions last year, because it had purchased the S-400 system; it remains to be seen if India meets a similar fate.
During the recently concluded India-US “2+2” dialogue in New Delhi on September 06, when Indian foreign and defence ministers had talks with their US counterparts, India had then clearly stated that it would go in for the S-400 system and that there could be no compromise on that given its strategic importance to India’s defence. If USA does place India under sanctions, it would send out a negative signal especially in relation to the ties that have grown steadily in the past two decades, which have led to many high value purchases in the pipeline. This would also be coming soon after India and the US signing the Communications Compatibility and Security Agreement—COMCASA—that now permits procurement of specialized equipment for encrypted communications for US-origin military platforms. In the power-corridors of Washington, senior officials have often described India as a “key pillar” of the Indo-Pacific strategy in the face of the unpredictable and aggressive rise of China. Sanctioning India, hence, would place it in the same category as China, with whom a full-blown trade war is ongoing, and a country that is viewed by USA as more of a ‘rule-breaker’ than as one which conforms to a rule-based world order.
India, apart from procuring the S-400 system has also indicated that it would continue purchasing Iranian crude even after the second round of sanctions against Iran kick-in in early November. Under the Obama-administration, a similar situation had arisen, and India was asked to show a significant reduction in its oil purchases from Iran; the US has now again said that it would consider a waiver on a case-to-case basis for nations that show a reduction in their imports of oil from Iran. the US has now again said that it would consider a waiver on a case-to-case basis for nations that show a reduction in their imports of oil from Iran. No guarantees have yet been publicly given by India on reduction of oil purchases, nor has India received any guarantees from USA. India also wants a sanctions waiver to be carved out for Chabahar, the strategic Iranian port that India is helping develop as a gateway to Afghanistan and Central Asia. Notwithstanding the threat of sanctions, India has clearly indicated its priorities, rather than succumbing to pressure!
Russia, and earlier, the erstwhile USSR, has been the sheet-anchor of India’s security policy. The military equipment at a relatively lower cost, and the general alignment by Russia with India’s regional policy, have helped shape India’s geo-strategic policies. It is only recently, in the last three decades or so, that India has aligned itself with USA. USA,
however, has proven to be a difficult customer with their global power and reach and to an extent its hubris, demanding the alignment of regional powers’ own security concerns with US interests. Through CAATSA, USA wants to wean away nations from purchasing Russian weapon systems and oil from Iran, and denuclearise North Korea.
Oil is another commodity that affects India in its path to prosperity. Annually, India imports 1.5 billion barrels of crude oil, which amounts to around 86% of its yearly requirement. The current surge in oil prices is increasing India’s expenditure, thus adversely affecting its fiscal deficit. The unilateral US withdrawal from the JCPOA has isolated it to quite an extent, with the other signatories continuing to support the agreement with Iran; even the UN nuclear inspection agency, IAEA, has given Iran a clean chit. India has indicated its intentions of continuing purchase of oil from Iran, much to the annoyance of USA.
There are reports from the International Energy Agency (IEA) that more oil and other petroleum liquids are being pumped out than ever before in the III quarter, by the OPEC nations and the Americas. While the price did rise last week to $85 per barrel on fears of the short supply due to the looming sanctions against Iran, prices have since retreated as the focus now shifts to the demand threats of faltering economies and the US-China trade war.
With the unpredictability of President Trump, one is not too sure of the duration of his animosity towards Russia. If USA is serious about countering China, it has to get Russia on its side. For India, it is a tightrope walk, as it has compelling reasons to collaborate with both USA and Russia.
How will India fare in this test of diplomacy? The wait is not going to be too long!
By Air Marshal Dhiraj Kukreja