The Indian Dilemma Following the US Sanctions on Iran

With US President Donald Trump’s decision to withdraw from the Iran Nuclear deal, he has deserted both his old Western allies and new Eastern partners while triggering a new crisis in the Middle East.

With US President Donald Trump’s decision to withdraw from the Iran Nuclear deal, he has deserted both his old Western allies and new Eastern partners while triggering a new crisis in the Middle East. The profound global effects which will ensue from Trump’s unilateral decision will not leave India immune to the fallout.

On April 28, after being asked during her annual press conference about India’s response to the US decision to impose new sanctions on Iran, Indian foreign minister Sushma Swaraj made the following bold statement: “India follows only the UN sanctions, not unilateral sanctions by any country”.

Impact on Indian oil imports and its projects in Iran

After Iraq and Saudi Arabia, Iran is the third largest source of India’s oil import. Iran supplied 18.4 million tonnes of crude oil during April 2017 and January 2018 (the first 10 months of the 2017-2018 fiscal year). Indian business groups acknowledge that the re-imposition of sanctions on Iran will have an adverse impact on the Indian economy. However, Indian oil industry experts and officials believe that there will be no immediate impact, although the country will have to wait and observe how other nations, like the European block, react to the new sanctions. If European nations manage to pursue their course of action independently, then Iranian supplies to India will continue uninterruptedly. It is in this context that Indian Prime Minister Narendra Modi had held talks with German Chancellor Angela Merkel and then Russian President Vladimir Putin to ascertain their views as to how to minimize the impact of Trumps' decision to abandon the Iran deal.

Strategically important Indian projects in Iran like the Chabahar deep sea port in Iran’s Sistan and Baluchistan province and the investments in the giant Farzad B gas field may also face detrimental repercussions as a result of the US decision. The Chabahar Port provides India a link to Afghanistan and the Central Asian Republics, bypassing Pakistan. Moreover, Indian companies had been allowed to invest in various projects in Iran using the domestic currency.

Balancing the US-Russia-China while retaining strategic autonomy

After making great strides during the last few years, India-US ties seem to have stagnated. Situated at the heart of the issues lies the two countries' contrasting relationship with Russia and Iran. While the US has imposed sanctions on both countries, India has maintained that it would continue dealing with both nations.

The former Soviet Union, currently Russia, has long been a strategic partner and major military equipment supplier to India. The Indian military presently accounts 70 per cent of its inventory, from warships to submarines, fighter aircraft to helicopters and tanks to missiles, as Russian. Furthermore, India and Russia are at the final stage to ink the deal enabling the former to purchase an S-400 surface-to-air missile defence system from Russia. Although due to US sanctions on Russia, the purchase of the S-400 has now become a thorny issue. Considering that the Countering America's Adversaries Through Sanctions Act (CAATSA) mandates the Trump administration to penalize the entities engaging in a significant transaction with the defence or intelligence sectors of Russia, India will have to find a way to evade the US sanctions.

In contrast, since the end of the Cold War, India-US relations have dramatically improved. The signing of the Logistics Exchange Memorandum of Agreement (LEMOA) in 2016 helped pave the way for India to establish strategic relations with the US. Moreover, there is no doubt that the US granting the Nuclear Supplier Group (NSG) waiver to India for the civil nuclear facilities helped India to obtain membership of elite non-proliferation regimes. With full US backing, India is now a member of the Missile Technology Control Regime (MTCR), the Wassenaar Arrangement (WA), as well as the Australia Group (AG), three of four non-proliferation regimes. The US has also been lobbying for India’s membership in the NSG.

After having a drift towards the US camp in the last few years, the recent Wuhan Summit between Indian Prime Minister Modi and Chinese President Xi Jinping signals that India is now leaning towards a balance in global order. Indian Naval Chief Admiral Sunil Lanba’s statement is important in this regard where he modulated the military dimension of the US, Japan, India, and Australia Quad to counter rising China: “We are not going down that road and don’t there is a need to give a military dimension to the Quad,” Lanba said. Moreover, the statement of the Indian foreign minister on Iran sanctions further clarified the message that India is not going to choose between the US and others and would prefer to exercise its strategic autonomy and take decisions in line with its national interest.

Wait and watch the European response

In actuality, the nuclear deal itself won’t be scrapped as long as Iran and the other signatories- the UK, France, Russia, China, Germany and the European Union- remain committed to it. Nonetheless, the commercial parties doing business with Iran will feel the impact of unilateral US sanctions on Iran. Top Indian officials confirmed that they are intently monitoring the situation and will observe how the Western nations’ strategy to ward off the impact of the sanctions will unfold. In the past, India developed a mechanism to maintain economic ties with Iran when US sanctions were imposed on it, although, the import of Iranian crude had been curtailed.

Surging oil prices and the country’s rising demand

As India’s oil needs are heavily reliant, more than 80 per cent, upon imports, increased demand and steady rise in international crude oil prices, aside from pinching the pockets of Indian consumers, may also disrupt the government’s fiscal calculations. The country’s crude oil import bill is expected to surge by 20 per cent to $105 billion in the financial year 2018-2019 against $88 billion in 2017-2018. Furthermore, Iran sanctions while hyping the tension in the Middle East, may unswervingly spike crude oil prices. The renewed sanctions will not only impact India’s crude basket import but may also increase the current account deficit.

Seeking the waiver once again

India would expect to obtain a waiver from US sanctions on Iran as it received during the Obama administration. The wavier India, along with Iran's other major clients, China, Japan and South Korea, had obtained, aimed to force Tehran to negotiate an end to its nuclear programme. In the arising situation, India is corresponding with Iran, Russia, and the European Union to gauge the impact of US sanctions on Tehran and, consequently, its impact on New Delhi’s oil payments. Particularly, if curbs on international financial transactions through the widely utilized SWIFT network are imposed after a wind-down period of 180 days in the first week of November. It is worth mentioning that during the previous sanction period India had submitted 45 per cent of Iranian oil import payments using the rupee and for the balance, India routed payments in euros through banks in Turkey and Germany.

Suffice it to say that the task of circumventing US sanctions will be arduous for India, however, it is also valid that a major oil importer such as India is not able to completely freeze oil imports from Iran. A concession should be offered as in the previous sanctions period where India reduced its oil imports from Iran in exchange for the US wavier. Iran’s oil supplies to India fell by around 1 million barrels per day (bpd) during the last round of sanctions, however, the country re-emerged as a major oil exporter once the sanctions were lifted in January 2016.

Conclusion

India, while exerting a clear message on US sanctions during the Iranian foreign minister Javad Zarif’s visit to New Delhi, expressed that it would not abide by the hardened unilateral sanctions on Iran by the US and would only abide by UN sanctions. By this message, India would pursue a common ground not only in the case of Iran but also the proposed purchase of the air defence missile system and other military supplies from sanctions-hit Russia. Like the compromise reached during the previous sanctions by the Obama administration where India obtained the waiver and in return reduced the import of Iranian crude to half, India would expect a similar arrangement this round once again.

Thus, by pre-empting the magnitude of the impact of Iran sanctions after the wind-down period of 180 days in the first week of November, India is seeking to move into a position to negotiate with the US on a waiver conducive to its interests.

The views expressed in this article are the authors’ own and do not necessarily reflect IRAM’s editorial policy.

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