Impact of U.S. Economic sanctions on ‘Indo-Iranian Relations’

Pooja Kotwal
India and Iran share ties of deep cultural and historical relationships. The relationship dates back to the Persian Empire of Cyrus, the great. During the Mughal period (1526-1757) in India, both the nations influenced each other in the fields of art, culture, architecture, and language. Until 1947, India and Iran shared a border, however, after partition, the border became part of the newly formed Pakistan. Despite the shared understanding between the two, Iran’s alignment with the Western countries during the Cold War period and India’s nonalignment policy prevented the two from a close interaction. The Islamic Revolution of 1979 also impacted the relationship between two countries. Iran’s anti-Indian stand over Kashmir issue and its continuous efforts to spread its Islamic Revolution also irked India. Iran’s close proximity with Pakistan and India’s closeness towards Iraq during the Iran-Iraq war (1980-88) also contributed in creating a distance between the two. However, the ties were improved with the deterioration of Pakistan-Iran relations following the Islamic Revolution and increased hostility of Shi’ite Iran towards Sunni dominated Pakistan. With the visit of Indian Prime Minister P.V. Narsimha Rao in 1993 followed by the subsequent visit of Iranian President Akbar Hashemi Rafsanjani in 1995, the Indo-Iranian relations were boosted. The milestone towards a cordial relationship between the countries was set up with the visit of Indian Prime Minister Atal Bihari Vajpayee in 2001 and the reciprocal visit of Iranian President Mohammad Khatami to India in 2003. The then Foreign Secretary Kanwal Sibal while emphasising the significance of the relationship postulated that ‘there should be no doubt regarding the strategic importance New Delhi attaches to the relationship’.
The recent imposed economic sanctions of November 2018 on Iran by the U.S administration have brought mayhem for certain oil importing countries like China, South Korea, Greece, Italy, Taiwan, Turkey, Japan, including India. The latest decision of April 22, 2019 conveyed by the U.S. secretary of state Mike Pompeo not to issue any ‘Significant Reduction Exceptions’ to existing importers of Iranian oil might depreciate the Indo-Iranian relations. According to the Directorate General of Commercial Intelligence and Statistics, Iran was India’s biggest supplier of crude oil after Saudi Arabia till 2010-11. With the subsequent unilateral sanctions imposed over Iran, the position of Iran moved down to seventh in number in 2013. In 2018, the Persian Gulf nation became the third largest crude oil supplier to India. Buying crude oil from Iran was more resourceful for Indian refiners since Iran provided ninety days of credit purchases along with cheaper freight due to proximity. The reimposed economic sanctions on Iran have dethroned Iran and Saudi Arabia (the traditional top oil source) to be the largest crude oil supplier. The sources suggest that Iraq has become India’ top oil supplier with the selling of 46.61 million tonnes (mt) of crude oil during April and March 2019 which is 2% more than 45.74 mt supplied in 2017-18 fiscal. Until March 2019, India was restricted to daily purchases of some 2,58,000 barrels per day of Iranian oil. As the Indian Oil Ministry requested refiners to prepare for a “drastic reduction or zero” imports from Iran- Indian Companies- Nayaro Energy, Indian Oil Corporation, Hindustan Petroleum Corporation Limited have started looking for alternative supplies. The decreasing oil trade between India and Iran indicates that India will be forced to abide by the sanctions imposed by the U.S.
Since the beginning of 2017, U.S. has been emerging as a major source of crude oil. In 2017-18, the supplies were at 1.4 mt, however, in 2018-19, the supplies increased fourfold to 6.4 mt. Considering the two important deals of military importance with U.S (the Logistics Exchange Memorandum of Agreement and the Communications Compatibility and Security Agreement), the question arises, whether India will be able to accommodate its relations with both U.S. and Iran when U.S. strongly wants to bring Iranian oil exports to “zero”? The External Affairs Minister Sushma Swaraj asked for a waiver for the continuous import of Iranian oil after the May 2 deadline (In November 2018, 8 countries including India were allowed to buy Iranian oil without facing U.S. sanctions until May 2, 2019). There seems no possibility of a new waiver from the U.S. officials. In the midst of election campaigns and the domestic politics going over crude oil, will India capitulate to the unilateral sanctions imposed by the U.S.?
The importance of Iran not only lies in the economic sphere but also in the geopolitical sphere. India has invested in building the Chabahar port which is expected to open a new route connecting India, Iran and Afghanistan bypassing Pakistan. The involvement of India in Chabahar port will be beneficial in countering Chinese presence in the Arabian Sea since China helped Pakistan in building Gwadar port which is only 100 kms apart from Chabahar port through searoute. Due to its involvement in Gwadar port, if China ever decides to show an upper hand in the Indian ocean, Persian Gulf and the West Asian region, Iran can become a military ally to India. Additionally, Chabahar can also help in improving economic ties between India and Afghanistan. This ambitious project is being seen as a gateway for trade by India, Iran and Afghanistan with the Central Asian countries. Iran shares India’s antagonism towards Pakistan, which it considers Washington’s proxy and Saudi Arabia’s ally. The U.S. Department of State has, however, made it clear that the imposed economic sanctions will not affect the operation of Chabahar port. A State Department Spokesperson said, ‘The exception for reconstruction and economic development for Afghanistan, which includes the development and operation of Chabahar port, is a separate exception, and is not affected by yesterday’s announcement’. The question is will India be able to maintain its cordial relations with Iran geopolitically if India will not import crude oil further from Iran?
Harsh Vardhan Shringla, the ambassador to the United States said at a Carnegie Endowment Event in May 2019, that the impact of the sanctions can escalate inflation and result into higher oil prices. He further added that many of the oil refineries in India have been calibrated to process crude oil from Iran and due to the sudden economic sanctions it is not possible to convert those refineries (to run) some other form of crude. The cutting off sales of oil from Iran would raise questions about long term agreements on pricing and quality in the oil business. The Petroleum and Natural Gas Minister Dharmendra Pradhan postulated that in order to compensate for the loss of Iranian crude, India will get additional supplies from other major oil-producing countries. External Affairs Ministry Spokesperson said that India will deal with the issue based on three factors- the country’s energy security, commercial consideration and economic interest. While in May 2018, Sushma Swaraj, asserted that India only recognises UN sanctions and not unilateral sanctions made by the U.S. Despite the strong statements, it does not seem that India is likely to disobey the U.S demands.
India can not afford to disobey American demands considering the latter’s importance in India’s economy. Due to the convergence of American and Indian interests in containing China in the Indo-Pacific region, the importance of civil nuclear relationship with U.S., the American support for India’s bid to enter the Nuclear Suppliers Group, India cannot overlook the strategic importance of U.S. In the current scenario of election campaigns, the domestic politics of oil is also going on. Political parties including Congress and the Left Front have made it clear that the Narendra Modi administration should not bow to the U.S. sanctions and reject it. Interestingly, Congress has maintained its position of silent spectator regarding the Indian response towards the oil sanctions since Iran moved from seventh position in 2013 to third in 2018. Even during the tenure of Congress (2004-14), the party had to cut imports on sanctions being imposed by the U.S. In India,
The Iranian conundrum will make it harder for the Indian government to meet its planned imports for the year. Even the imports from Iraq and Saudi Arabia have not proved enough to replace Iranian crude oil. In addition to this, retrofitting state-owned refineries that process Iranian crude oil have to be replaced for the procession of any other kind which will be an expensive deal. Considering the fact that most of the state refineries in India are state -owned, the expenses would have to be made by the government. The official responses from the Indian government gave the reply that they expected that a new waiver will not be given so they were prepared for the outcome and the country has alternate supplies lined up to fill the gap. Also, the Indian government made positive interactions with other Gulf states, especially Saudi Arabia and the United Arab Emirates, who have stepped up exports to assist India. India has certainly not been able to accommodate its relations with U.S. and Iran since it has not been able to maintain a neutral stand as evident from the reduced import of crude oil from Iran. The decision of economic sanctions could not have come at a worse time since it is in the midst of elections and policy makers focussing on the domestic scene. Whatever the situation is on the domestic front, the impact of economic sanctions would not surely be good for India which can be foreseen in terms of inflation soon. As a matter of fact, the pressure of economic sanctions would negatively impact the Indo-Iranian relations.
(The author is Doctoral Candidate Center of West Asian Studies School of International Relations, JNU, N Delhi)