The conditional waivers granted to selected Asian countries are set to expire on May 2, 2019 and the Trump administration’s declaration not to grant any further exemptions to these countries are likely to impact negatively major oil importing countries like India, China, South Korea, and Japan. They have to either replace Iranian oil with some other sources or find innovative ways to deal with this new situation. Escalating tension between Iran and the United States has once again exposed India and Iran to new set of challenges to take their energy and trade ties forward.
A new chapter of cooperation was initiated by Prime Minister Narendra Modi during his visit in May 2016 when leadership of both the countries agreed to develop an all-out comprehensive strategic economic cooperation with focus on infrastructure development, trade, economic and energy cooperation and cementing the politico-strategic dimension of India-Iran relations. This got further impetus re-energising the bilateral partnership during President Hassan Rouhani’s three-day visit to India from February 15-17, 2018.
Despite sanctions both the countries were not only able to manage cooperation in the economic and energy sector but were very successfully able to operationalize the Chabahar Port project connecting India, Iran , Afghanistan with future prospects of connectivity to Eurasia. However, present advise of the U.S. administration to the oil importing countries to stop all oil purchases from Iran is definitely not a good news for New Delhi. Iran was until 2006 India’s second-largest supplier of crude oil. But it dropped to number seven by the end of 2013-14 importing only 6 per cent. However, India continues to be Iran’s second-largest buyer, next only to China. In terms of quantity, India’s imports came down from 27.14 million tonnes in 2016-17 to 17.62 million tonnes during 2018-2019 (April-October).
Key questions that merit some attention is will India completely cut off its oil imports from Iran under mounting pressure from the U.S? What are the options available for India? Can New Delhi put its ties with Iran at risk given its strategic significance regionally for India? Buying Iranian oil is more lucrative for Indian refiners, as Iran provides 90 days of credit purchases along with cheaper freight due to proximity. This is an offer not provided by other substitute suppliers – Iraq, Kuwait, Saudi Arabia, Nigeria and the US. In the past, India paid in rupees for its oil imports from Iran through UCO Bank. This option is available to India. Oil companies can use UCO or IDBI Bank to route oil payments to Iran. As both banks don’t have dealings in the US, this could be a possible option. Iran can use the rupee to settle its imports of goods from India. After 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 Ltd (HPCL) have started looking for alternative supplies. Venezuela another significant supplier is also reeling from sanctions thus increasing India’s dependence on Saudi Arabia, UAE, Iraq and its African partners. Given India’s increasing energy demands it will be real challenge for India to do without Iranian oil which is not only affordable but is in the geographical proximity.
More importantly, regionally Iran’s significance for India as gateway to Eurasia, its growing role and levers in West Asia and Afghanistan make it difficult for India to abandon Iran under the U.S pressure. Regionally, India needs Iran both for its connectivity projects INSTC and Chabahar, support and engagement in Afghanistan and its cooperation to maintain balanced ties with China, Pakistan and Russia. This important as, geo-politically the realignment of regional players like Iran – China- Russia and Iran-Afghanistan-Pakistan-China and Russia demand India’s continued engagement with Iran. In present situation, India will have to work on twofold strategy, first how to get special exemptions like it has got for Chabahar port negotiating with Trump administration and secondly, finding innovative mechanism to sustain its current momentum of overall security and economic ties with Iran.
Isolating Iran is not likely to bring any peace and development in the region. Mitigating hostility is likely to deliver better results not only for the US and Iran but bring greater benefits for the larger international and regional community as well. Given the current volatile situation in Yemen and Libya combined with major uncertainty in Iraq, Syria and Afghanistan it is extremely important to engage Iran to find long-term solutions to the regional problems through smart, balanced diplomacy and dialogue.