The US Sanctions against Iran are kicking in. But India needs the oil. So what happens next?
As of today, US sanctions against those companies and countries that do business with Iran have kicked in. Washington wants India to not only turn the tap off oil imports from Tehran to zero, but also to jettison its investment and future plans to build Iran’s strategic port, Chabahar, which was meant to sidestep Pakistan to reach Afghanistan and beyond to Central Asia. How India deals with the US threat of sanctions on oil and Chabahar will decide whether it has the heft to influence the US to grant them a waiver or the internal resilience to exercise strategic autonomy.
There are unconfirmed reports of India getting a waiver, both on Chabahar and oil imports, but some US government sources claim that they would be surprised if that happens as President Trump would have to follow a tedious three-stage process. Worse, if India gets a waiver, it would set up a wrong precedent for US. A waiver to India would be more because of US fear of implications of refusing them: India could get into a tighter embrace of the new global compact, Russia and China. If this happens, then it could represent the stirrings of a new global order. It is unlikely that the US, after years of investment, would allow India to drift to its enemies.
Also, the US administration would not like to be perceived by New Delhi as the reason for the exorbitant rise in oil prices that could become the reason for Modi’s electoral debacle. Alice Wells, principal deputy assistant secretary for South and Central Asia, had hinted: “The sanctions were not meant to penalize India.”
Till now India has shown some spine to tell United States that it would not recognize bilateral sanctions between the countries, and therefore it may not be possible for it to end its oil imports from Iran altogether — at best it can bring it down. The rumored deal suggests that India has been allowed to import 1.25 million tonnes of oil every month till March 2019. This is similar to the level of oil imports from Iran at the time of UN sanctions, which were lifted after long drawn out painstaking agreement signed between P5+1 countries. The agreement is tottering after the US walked out of it.
The European Union has announced that it would not abide by US sanctions and is looking for ways to do business with Iran. India seems to have drawn comfort from the resistance displayed by EU, Russia and China, and has already ordered oil imports for the month for November, after it gave an impression in July and August that it was pruning it to meet US approval.
Iranian oil comes cheap in comparison to fuel sourced from other countries. Iran gives a three-month credit, defrays tanker costs and gives a discount of $4-5 per barrel. The package on offer cannot be matched by any other producer, though US has been asking Saudi Arabia to hike its oil production to meet the shortfall that the rejection of Iranian oil will cause. Iran believes that the demand-and-supply balance will be strained, and prices could go through the ceiling if Iran’s oil is stopped. Though supply of oil is not an issue, what is of concern for India is the relatively cheap oil that Iran and Venezuela were putting in the market. The cash strapped Venezuela does not have the funds to look after its hydrocarbon infrastructure or even produce oil.
Iran is cognizant of India’s vulnerability on account of oil prices as it approaches elections. A senior Iran official who dealt with his counterpart said that he found the Indians deeply worried about the implications of oil supplies on voting behavior. In 2013-14, when the oil prices were climbing to $140 per barrel, the United Progressive Alliance (UPA) was hammered by the opposition as inadequate to handling a crisis. Election results proved that high oil prices contributed to UPA misery. For this reason, the Iranians think that India would lobby hard to save their supplies from their country.
If US sanctions are indeed imposed on Indian public sector companies for importing oil from Iran, then they would be forced to explore the special purpose vehicle that the EU has decided to put together to allow the use of Euro, Ruble and Renminbi for doing business with Tehran. The sanctions are triggered when any company transacts with Iran through the swift payment system every month.
The problem with India is that it has a bilateral trade deficit of US$8.5 billion, and has to figure out ways to balance it. There are suggestions that the deficit could be taken care of in the infrastructural development of Chabahar port, which is also in jeopardy if the US sanctions are imposed. The US Ambassador Kenneth Juster, though, claimed that the two countries were engaged in a discussion over the issue of Chabahar.
Last December, India had dispatched a consignment of wheat to Afghanistan a week after the visit of former US Secretary of State Rex Tillorson. At that time, it was assumed that Chabahar has the approval of the US, which could use the Iran’s port for the withdrawal of its troops. The US, though, gave no assurance on Chabahar after it announced new sanctions against Iran. This confusion has hurt India’s grand plans to reconnect through a land route with Central Asia after its ties with severed by partition and Pakistan’s refusal to grant them transit.
Also, on offer to India is the use of Russia-Iran sponsored 7200 km long North-South corridor. This corridor helps cut down travel time by 21 days, and costs by 30-40 percent in comparison to taking the Suez Canal route when a consignment is sent to Moscow from Mumbai. These new routes make a strong case for connectivity, and they can serve as a counterpoint to China’s Belt and Road Initiative (BRI). Chabahar also serves as a commercial and strategic counterpoint to China-bankrolled Gwadar port, which is the beginning of $ 53 billion China Pakistan Economic Corridor ( CPEC).
Despite all kinds of expectations of so called West Asian experts, Iran has not given Chabahar’s development to China and hung on to India — even when it is slow and finds it difficult to meet its financial commitments. The coming days will show which way the oil is flowing for India and Iran.