President Donald Trump withdrew from the landmark Iran nuclear deal in May following months of speculation. Formally titled the “Joint Comprehensive Plan of Action” (JCOPA), the multilateral accord was aimed at limiting Tehran’s disputed nuclear program in exchange for relief from international sanctions targeting Iran’s lucrative oil trade with countries like India. Shortly after the agreement was announced in July 2015, Indian officials characterized it as the “best deal available” at the time. New Delhi seized on the opportunity to repair its economic and commercial relations with Tehran, which had suffered under the longstanding sanctions regime.
With new sanctions set to take effect in November, what does President Trump’s withdrawal from JCOPA mean for India and Indian companies conducting business with Iran?
The most direct consequence will likely be a reduction in Iranian oil exports to India. Energy cooperation has long represented a central pillar of bilateral ties. India is the world’s third largest oil consumer and is expected to become the largest by 2040. But its meager domestic reserves have forced it to import 80% of its oil from abroad, including from Iran, India’s third-largest oil supplier. After China, India is Iran’s largest oil customer. India imported 27.2 million tons of crude worth of $11.1 billion between 2017-2018.
Less than ten years ago, Iran accounted for nearly 17% of India’s crude imports. Sanctions imposed on Tehran by the Obama Administration in 2012, however, forced India to curtail its imports of Iranian oil by half their previous levels or otherwise risk jeopardizing its companies’ access to the U.S. banking system as a result of secondary sanctions. New Delhi ultimately secured numerous sanctions waivers from Washington permitting the smaller oil purchases, but Iran’s share of India's imports fell to less than 7%.
Although exports of Iranian oil to India surged by more than 110% after sanctions were lifted following implementation of JCOPA in 2016, American withdrawal from the accord has found India back in a familiar position: forced to either slash its oil imports from Iran or risk exposure to U.S. sanctions. Indian officials recently announced that India does not recognize, and would not abide by, unilateral American sanctions, effectively pledging to maintain current import levels. New Delhi made similar pronouncements in 2012. But if the past is any indication of the future, India is still likely to experience a reduction in crude imports for several reasons.
First, Indian refiners have already begun to voluntarily reduce Iranian imports. On May 30, for example, Reliance Industries, owner of the world’s largest oil refining complex and chief purchaser of Iranian crude, announced it would cease oil imports from Iran in October or November as a result of the sanctions risk from the United States. In 2017, Reliance imported approximately 67,000 barrels per day (bpd) of crude from Iran. These imports increased to 96,000 bpd during the first quarter of 2018. With India currently importing 604,000 bpd from Iran, Reliance’s decision will reduce Iran’s exports to India by more than 15% alone. The question that arises is whether India’s other major private and state-owned refiners, including Essar Oil, Indian Oil and HPCL-Mittal Energy Ltd., will follow suit.
Second, refiners seeking to maintain present crude import levels will now have to contend with global shipping and insurance companies increasingly unwilling to engage in Iran-related transactions because of the looming sanctions risk. Without tankers to transport the oil and coverage to insure the cargo, oil trade will inevitably suffer.
Third, payment for crude imports will resurface as a serious obstacle for both countries. Without access to the U.S. financial system, India and Iran will have to devise workarounds to facilitate and preserve their commerce in oil. Although Iranian crude exports to India continued after 2012 at reduced levels, New Delhi was forced to pay for them through a complex combination of euros, rupees and barter system. Resurrecting a similar arrangement will be a formidable task, especially given that several Indian banks have already instructed their commercial clients to complete their financial transactions with Iran before sanctions take effect.
Moreover, some immediate consequences of President Trump’s decision to pull out from the Iran deal have already begun reverberating in India. News of the withdrawal was followed by the the rupee’s weakening against the dollar, increased foreign exchange outflows and higher gas prices at pumps across India because of higher oil import bills.
At the same time, there are those who see opportunity for India. Many predict Iran will offer India better terms on its oil exports as an incentive for New Delhi to maintain current import levels, particularly as India will look to diversify its oil supply. Although some concessions can be expected, many questions remain unanswered.
Ultimately, oil trade between India and Iran will continue but at diminished levels. Indian companies with commercial ties with Iran must now address a host of formidable challenges to continue conducting business with the country.
Date: Jun 11, 2018