With the US presidential election due later this year, President Barack Obama has to be seen to be acting ‘tough’ on Iran’s nuclear ambitions. Israel plays a key role in shaping American policy on Iran. The Iranians have not helped their own cause by threatening to “wipe out” Israel and backing radical Arab groups like Hamas and Hizbullah, which are perceived as acting as spoilers in the West Asia peace process.
Virtually all of Iran’s Sunni Arab neighbours also fear Iranian intentions and echo international concern on the lack of transparency in its nuclear programme. With Iran threatening to shut the vital sea lanes of the Strait of Hormuz in the event of being attacked, Israel and the US appear to have been persuaded that military strikes would be counter-productive. Moreover, American National Intelligence Estimates have concluded that Iran is still one to three years away from assembling a nuclear weapon. Mr Obama has, therefore, acted continuously to tighten sanctions on Iranian oil exports.
On December 31, Mr Obama approved legislation imposing sanctions on foreign banks dealing with Iran’s Central Bank by channelling payments for Iranian oil exports. The President can exempt sanctions for six months on a country that significantly reduces its dealings with Iran, in situations where it is in American national security interests, or would be necessary for ensuring market stability. Sanctioned financial institutions would be frozen out of the US market.
Within weeks, the European Union followed suit, imposing sanctions on oil imports from Iran. These sanctions will come into effect on July 1. European Union members like Greece, Italy and Spain will be adversely affected by these sanctions. Debt-ridden Greece is likely to seek exemption, given its large exposure to oil imports on favourable terms from Iran. Within Asia, the major importers of Iranian crude are China, India, Japan and South Korea. Iran is China’s third largest supplier at 500,000 barrels per day. Moreover, China has committed huge investments in the oil and gas industry in Iran.
India has been hit hard by expanding Western sanctions on Iran’s oil and gas sector. With its surplus oil refining capacity, India’s exports of refined petroleum products reached around $40 billion last year. Refined petroleum products are our largest foreign exchange earner. But American sanctions have constricted our export market. Iran is a major importer of refined petroleum products and exports to Iran from the Reliance Oil Refinery in Junagadh have been progressively reduced and halted in the face of American sanctions. This is primarily because Reliance Industries, like most of our large industrial enterprises and financial institutions, has substantial business and financial interests in the US.
Towards the end of 2010, the US worked with its European partners to close avenues for payments using European banks, which India was making to Iran, through the Asian Clearing Union, for its oil imports. Pushed into a corner, India had to look for banks across the world for payments to Iran. An agreement was finally reached for payments through Turkey’s Halkbank in July 2011.
Anticipating the tightening of sanctions on Iran’s oil exports, India has worked to quietly reduce its exposure to Iranian oil imports which are likely to fall to an estimated 13 million tonnes in this financial year from 21.2 million tonnes barely two years ago. In the wake of improving relations after the visit of King Abdullah, India is reported to have received assurances from Saudi Arabia that it would be happy to meet any shortfalls we may face following reductions in imports from Iran. The Saudis are also reported to have given China similar assurances.
China has been particularly pro-active in dealing with the emerging situation, with Premier Wen Jiabao visiting Saudi Arabia, Qatar and the UAE earlier this month. Mr Wen’s visit to Saudi Arabia led to a Chinese investment of $8.5 billion in an oil refinery which will process off-shore oil for shipment through a pipeline bypassing the volatile Strait of Hormuz. Similar investments by China are envisaged in Abu Dhabi. Like in Central Asia, China has acted more deftly and imaginatively than India has in the Persian Gulf in guaranteeing its energy security.
India will now have to move imaginatively and expeditiously to devise alternative payment mechanisms for Iranian oil imports. Statements by Halkbank representatives indicate that Turkey will fall in line by July 1 and comply with American and EU sanctions on Iranian oil exports. One option for India would be to see if payments are possible through Russia, which is today the largest oil producer in the world, through a bank like Gazprom Bank which has dealings with Iran. But, there are indications that while Russia may back Iran against unilateral American sanctions, it may not like to directly undermine Western sanctions.
Another possibility is to consider using our currency swap arrangement with Japan for Iranian oil payments. But this again may prove unworkable, given the fact that Japan itself has formally asked the US for a six-month waiver of sanctions on its oil imports from Iran. While a rupee trade arrangement with Iran may be ideal, it remains doubtful if such an arrangement is possible in view of the fact that the rupee has been the worst performing Asian currency in 2011. Moreover, the viability of such an arrangement may be limited, given the huge trade deficit we have with Iran.
Despite these difficulties and notwithstanding the fact that Iran has been an unreliable partner in honouring contracts it has signed on supply of gas to India, we should seek innovative means, including the use of Indian banks like UCO Bank, which do not have exposure to American markets and financial institutions, for routing payments for oil imports from Iran. The Americans cannot claim to be our ‘strategic partners’ on the one hand, while undermining our energy security on the other.
Moreover, given the uncertainties of American policy in Afghanistan, Iran, which is our primary gateway to Afghanistan and Central Asia, will remain a crucial partner for facilitating access to and safeguarding our interests in Afghanistan. There are concerns that like in Iraq, the Americans will withdraw completely from Afghanistan in 2014, leaving behind an unstable, financially bankrupt and violence-ridden country. Iran and India would find a destabilised and dysfunctional Afghanistan, which will again become a haven for terrorism, a source of serious and common concern.
The Iranians, in turn, will, however, have to be advised to be more transparent on their nuclear programme, if they are to overcome their growing international isolation.
The accompanying visual shows a goldsmith displaying gold coins in the Old Bazaar of Tehran. Iranians, worried about the impact of sanctions, are buying dollars and gold coins instead of depositing their money in banks. To avoid a liquidity crisis, President Mahmoud Ahmadinejad has hiked interest rates to 21 per cent. AP photo by Vahid Salemi.
