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India's Iran dilemma

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India's Iran dilemma

In light of Trump’s diktat on stopping oil imports from Iran, India must craft its policy carefully, so that it protects its  interests with Iran

In another of many policy reversals of the previous administrations, US President Donald Trump withdrew from the nuclear deal with Iran that was signed by his predecessor, Barack Obama. The immediate impact of such a decision was that Iran was squeezed of foreign investment as investors, particularly the Europeans, are frightened to take the risks. Further, the Trump administration has issued a diktat that all oil imports from Iran, including that by India, must be stopped from November 4 and countries failing to meet this deadline shall face the prospect of US sanctions. India is unwilling to accept such a diktat. Iran, a regional power, is not only key to oil supplies to India but also its gateway to Eurasia and Afghanistan.

In May 2018, when Trump announced that US would withdraw from the Joint Comprehensive Plan of Action, the multilateral agreement constraining Iran’s nuclear programme in exchange for sanctions relief, little was perceived about the consequences the decision would entail. Trump called the Iran deal “decaying and rotten” but did not offer any specifics of how he would replace it or how he would restrain Iran from rebuilding its nuclear infrastructure should it choose to do so. Trump’s main aim was to target Iran’s energy, petrochemical, and financial sectors, which effectively took the US out of the agreement. But the European stakeholders — including French President Emmanuel Macron, German Chancellor Angela Merkel, and British Foreign Minister Boris Johnson — sensed the fallout of such a decision and rushed to Washington urging Trump to remain in the deal, but to no avail. This was despite the fact that the International Atomic Energy Agency (IAEA), the organisation responsible for monitoring Iran’s compliance with the agreement, consistently found that it had abided by the deal since it entered into force in 2016.

What is most disturbing after the tension in the Korean Peninsula is Trump’s annulment of the nuclear deal with Iran signed by his predecessor in cooperation with other European allies. The US diktat to world companies to cut oil imports from Iran to zero by November 4 or face US sanctions is a new element in world diplomacy. This is worrying the European allies, who were part of the Iran nuclear deal. The US decision has already started adversely impacting some European companies. For example, French automaker Peugeot now has started viewing Iran as too risky a place to do business. For the US, the window between May 8 and November 4 deadline is the drawdown period when countries importing oil from Iran should start reducing immediately and bring to zero by November 4 deadline.

The move applies not only to Europe but also to India, China, and Turkey. Following this announcement, oil prices rose sharply, and depressed currencies of many countries (in India, rupee breached 69 a dollar mark), making imports of critical products more expensive. Iran is OPEC’s third largest oil producer, exporting two million barrels a day.

Britain, France, Germany, and the European Union as a whole strongly protested Trump’s withdrawal from the Iran nuclear deal and vowed to protect their companies from “secondary sanctions”, which punish companies from other countries that engage in business with sanctioned sectors of the Iranian economy. The US, however, says that secondary sanctions are in place in Iran since 1996.

Trump seems to be needlessly interfering in Iran as his policy on the nuclear issue and sanctions have created domestic turmoil, leading to increasing street protests. The US State Department argues that “Iranians are basically fed up with the regime’s squandering of the nation’s wealth on not particularly productive or enriching ventures abroad”. While the rial collapsed in foreign exchange markets and the country’s economic woes worsened, Iranian President Hassan Rouhani called for unity to cope with the new challenge the nation faces now. 

The US Ambassador to the UN, Nikki Haley, was in India and in her meeting with Prime Minister Narendra Modi urged on cutting oil imports, but was politely told that it would be difficult for India to make any significant cut. India shall be unwilling to bend under the US pressure, as its relations with Iran range from the energy trade to connectivity projects, particularly the development of Chabahar Port, and cutting trade between the two countries could hurt India’s long-term interests.

Given that the Indo-US ties have warmed, it is unclear if Trump will unilaterally impose sanctions on India if the latter does not cut oil imports from Iran or give some waiver. There is a view in some quarters in the policy-making circles in India that the US is not threatening India over purchase of crude oil from Tehran. The US is already aware that India had already cut down its oil intake from the Islamic Republic to 6 per cent of the total oil it imports before the sanctions were lifted when Iran signed the deal with the US when Obama was in power. 

Despite the fact that Iran is experiencing domestic turmoil over governance issue, Iranian leaders are seeking ways to defend the nation’s economy from the US sanctions. After Trump pulled out of the nuclear deal, which lifted most sanctions in 2015, the rial currency dropped up to 40 per cent in value. This prompted protests by bazaar traders usually loyal to the Islamist rulers. Iran’s supreme leader, Ayatollah Ali Khamenei, has rightly said that the US sanctions were aimed at turning Iranians against the Government. Apart from the severe economic situation at home to the extent of even shortages of drinking water, Iran is increasingly finding it difficult to access the global financial system. It is not clear if President Rouhani’s counter-measures to withstand the sanctions can bring any succour and help bail out the nation from the negative impact of the sanctions.

Among the counter-measures that Iran is thinking is to attain self-sufficiency in gasoline production, look for potential buyers and ways of repatriating income in conformity with international law after the US sanctions take effect. Khamenei suspects that the US is acting with Sunni Muslim Gulf Arab states that regard Shi’ite Muslim Iran as their main regional foe to destabilise the Government in Tehran. 

Iran’s fears seem to be genuine. For example, Rudy Giuliani, former Mayor of New York City and an ally of Trump, said in a speech he delivered at the National Council of Resistance of Iran in Paris on June 30 that Trump’s move will suffocate Iran’s “dictatorial ayatollahs”, suggesting the decision to reimpose sanctions was aimed squarely at regime change. It appears that with the increased fear of sanctions, major European companies have started leaving the country despite Europe’s vows to save the nuclear accord. Even the US National Security Advisor John Bolton had made similar observations in the same forum in May 2016 before he assumed the current office. However, Britain, France, and Germany — which signed the nuclear accord along with the US, Russia, and China — opine that the agreement prevents Iran from developing weapons-grade nuclear fuel.

As with Iran, Trump also has a problematic relationship with Russian President Vladimir Putin, but despite that, a summit with him is scheduled for July 16 in Helsinki. Russia, too, faces sanctions over its annexation of Crimea some time ago. The truism, however, is that the US sanctions against Russia and Iran are backed neither by the UN nor the world community. Seen from this perspective, drawing India into this battle and coercing it to cut oil imports is neither justified nor legally valid. If India bends, it would risk breaking ties with its traditional allies. On its part, it would be against America’s interest to displease India as it needs it now more than ever before. Indian investments in Afghanistan assist the US in its effort to develop the nation. Secondly, India is the only country in Asia with the military and economic power to cope with the Chinese challenge and check its efforts to establish hegemony in the region, which is why military cooperation with India by the US could be of its interest. India should be careful not to allow itself to be used by the US against its traditional allies Russia and Iran.

If India bends to Trump’s diktat, it would be against its national interests. Russia is a time-tested friend of India, and has always stood by its side. Over 60 per cent of its military equipment is of Russian origin. With the example of the way Trump handled North Korea after exchanging diatribes against Kim Jong-un before meeting him in Singapore on June 12 and then praising him, India needs to be circumspect if it decides to review its decision to purchase S-400 from Russia, lest Trump’s change in direction could result in India spoiling its own relations with Russia and unable to restore the ties.

India’s economic and strategic interests are enmeshed with that of Iran’s. Seen to be a counter to China’s port development activities across Asia, such as in Sri Lanka, Maldives, Pakistan, and recently in Djibouti, Indian interests and participation in the development of Chabahar Port in Iran provides India with multiple strategic benefits. Moreover, India signed an agreement with Iran after Rouhani’s visit to India when it agreed to increase its oil purchases from Iran. Supporting Trump’s call to stop this shall not only violate that agreement but could push Iran away from India and would damage its agreement on the Chabahar Port. China is in multiple conflicts with the US and the largest purchaser of oil from Iran is unlikely to accede to the US requests. If India succumbs to Trump’s demands, it would almost mean gifting the Chabahar Port to China. 

So, what are then India’s options? Despite its growing proximity with the US, India needs to, as before, continue pursuing an independent foreign policy and not compromise with its national interests. As a first step, India should not sign the Communication, Compatibility, Security Agreement, underlining its disagreement with America’s unilateral policies.

In the meantime, with the announcement of the US sanctions against Iran, oil prices rose as significant volumes of crude oil from world markets were taken away coinciding with the increase in demand worldwide. Trump was quick to lash out at OPEC and warned that it is manipulating oil markets. The US put pressure on ally Saudi Arabia to raise supplies to compensate for lower exports from Iran. Saudi Arabia pumps around 10 million bpd and could raise output to 11 million bpd, but Trump wants Riyadh to increase production to 12 million bpd, something the kingdom has never done in the past. Rising gasoline prices could create a political headache for Trump. It remains to be seen if Saudi Arabia bails out Trump as it is the biggest producer of oil in the Middle East.

But the disturbing news is that India’s Oil Ministry has asked refiners to prepare for a “drastic reduction or zero” imports of Iranian oil from November as demanded by Trump. Does it mean that New Delhi is responding to a push by the US to cut trade ties with Iran and surrendering its autonomy to take policy decisions in conformity with its national interests? It is perplexing that while at the one hand, India says it does not recognise unilateral restrictions imposed by the US and only follows UN sanctions, it advises its oil refineries to prepare for a cut in imports and bring close to zero by the deadline given by Trump and look for alternatives.

India is the biggest buyer of Iranian oil after China and if India is forced to take action to protect its exposure to the US financial system, it could have huge implications for the region, besides jeopardising its ties with Iran.

It may be recalled that during the previous round of sanctions, 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. But this time, the situation is not the same. Now while India, China, and Europe are on one side, the US alone stands alone on the other.

The question that arises is how effective is Trump’s diktat? On the surface, it seems to be working. Reliance Industries Ltd, the operator of the world’s biggest refining complex, decided to halt imports. Nayara Energy, an Indian company promoted by Russian oil major Rosneft, is also preparing to halt imports of oil from Iran from November. The company has already started cutting its oil imports from June.

This leaves open the question if there are options to find replacements to Iranian oil. Though Saudi Arabia is expected to boost oil production, as it has pledged a “measurable” supply boost, it remains unclear if that is the best alternative to outcast Iran from the oil market.

Iran is not done yet and is unlikely to give in so quickly. In honouring its ties with India, it has offered virtually free shipping and an extended credit period of 60 days. India does have the option of buying oil from Saudi Arabia or Kuwait to replace Iran, but it has to consider what economic values such choices offer. India would be happy with the assurance given by Haley in New Delhi that a trade war with India “wasn’t an option” for the Trump administration.

India, therefore, needs to craft its Iran policy carefully; a policy that protects its important strategic and economic interests with Iran, while at the same time, does not displease other stakeholders.

Dr Panda, former Senior Fellow at the IDSA, was until recently ICCR Chair Professor at Reitaku University, Japan




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