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US-Iran Imbroglio: The Politics of Oil

US-Iran Imbroglio: The Politics of Oil
Iran FM Mohammad Javad Zarif (left) with Indian counterpart Sushma Swaraj/Photo: UNI
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Above: Iran FM Mohammad Javad Zarif (left) with Indian counterpart Sushma Swaraj/Photo: UNI

America’s directive to India not to lift Iranian oil leaves the new government with tough choices. It can neither afford to lose US markets nor jeopardise ties with Iran and the crucial Chabahar Port link

By Seema Guha

West Asia is once again in turmoil. The sabre rattling between the US and Iran has increased tension in the region and led to fears of a possible war there. Though Saudi Arabia, UAE and other US allies have not hiked oil prices and there is plenty available at the moment, American directives to India and China not to lift Iranian oil have now kicked in. The fact that Iran is a major supplier of oil and both the Asian giants buy large quantities of it makes the situation even more complex. The angry war of words between Washington and Tehran has not helped to calm an already volatile situation.

Despite the rhetoric, an immediate military confrontation is ruled out. But experts believe that with the entire region armed to the teeth, an accidental slip by one or the other may lead to an all-out war. Waiting on the sidelines and rooting for US action against Iran are Saudi Arabia and Israel, both close confidants of the Trump White House. Add to this US National Security Adviser John Bolton who had for long been pushing for war and a regime change in Iran. The US has already dispatched the USS Arlington, an amphibious ship with a Patriot missile battery, to join the USS Abraham Lincoln Carrier Strike Group and a bomber task force in US Central Command to the Gulf. The show of military might is a warning to Iran that the US is ready to strike if needed.

US President Donald Trump’s tweet on May 20 ratcheted up the war of words: “If Iran wants to fight, that will be the official end of Iran,” he tweeted. “Never threaten the United States again!” In reply, Iran’s foreign minister, Mohammad Javad Zarif, posted his own message on May 21 on Twitter: #EconomicTerrorism & genocidal taunts won’t “end Iran”. #NeverThreatenAnIranian. Try respect—it works!

Trump wants to cut Iran down to size and change the contours of West Asia to reflect a new reality where America’s interests and its allies call the shots. Having walked out of the nuclear deal with Iran, Trump is looking to rework it to America’s advantage and ensure that Iran does not challenge American allies in the region. Though all major countries including Iran, the US and Saudi Arabia profess they do not want war, the atmosphere is surcharged with threats and counter-threats.

Israel and Saudi Arabia had, like Trump, bitterly opposed the nuclear deal of 2015. The Joint Comprehensive Plan of Action negotiated between Iran and the P5+1 (China, France, Germany, Russia, the UK and the US), the hallmark of President Barack Obama’s second term in office, was a major diplomatic triumph for the world. Iran agreed to give up its nuclear programme in return for the lifting of crippling sanctions which had been slapped on it for decades. The deal led to great optimism across the world and strengthening of moderate elements in Iran. Its citizens looked forward to a boom in business and opportunities as foreign companies could now invest in the country.

Unfortunately, the hopes were quickly belied. Obama left office and Trump who had always regarded the nuclear deal as a sell-out to Iran, made no bones about going back on America’s commitment.

Trump wants to bring Iran to its knees through sanctions and get Tehran to the negotiating table to work out a fresh nuclear deal in accordance with Washington’s interests.

Israel and Saudi Arabia are delighted. As Trump got his son-in-law, Jared Kushner, to work on a Middle East Peace Plan, Washington, always a close ally of Saudi Arabia, grew even closer to Saudi king Salman and his son, Crown Prince Mohammed bin Salman. Israel and Saudi Arabia are partners in the US venture to reshape the Middle East. The Trump administration has called for a Peace to Prosperity conference in Bahrain at the end of June to work at a solution to the Israeli-Palestine problem. Unfortunately, after having announced the shift of the US embassy to Jerusalem, which means a virtual endorsement of the Israeli position, it is unlikely that this initiative would succeed. But this is part of the big US push in the Middle East. For the Palestinians, America is no longer an honest broker as it has already compromised its position on Jerusalem. As in his Middle East peace plan which is heavily tilted towards Israel, Trump’s policy towards Iran veers towards Israel and Saudi Arabia.

Whether there is threat of war or not, India’s immediate concern is that Iranian oil is now out of bounds. Buying oil from it now will mean that Indian companies will be under US sanctions. This entails closure of US markets and financial institutions not just for India, but other countries, including China. No nation can afford to be cut off from the American financial system and its high-tech industries. So while India had always said that it does not abide by sanctions slapped by individual nations and respects only UNSC sanctions, in reality, it has little room to manoeuvre with the US at the moment.

The US introduced sanctions against Iran in November 2018, but gave a six-month waiver to eight nations, including India, which allowed them to import some Iranian oil. The irony is that the US after walking out of an international agreement endorsed by the Obama government has decided to punish Iran with sanctions and the rest of the world despite anger against the US, is not in a position to defy Trump.

India was allowed to buy an average of 3,00,000 barrels per day of oil during November-April, but actual volumes varied from month to month due to lack of ships after foreign shipping lines backed out of Iranian deals under pressure from US sanctions. In April, Washington asked buyers of Iranian oil, mostly in Asia, to halt purchases or face sanctions.

Zarif flew in to Delhi earlier this month to discuss the sanctions and met External Affairs Minister Sushma Swaraj. But he was told that she could give him no commitment as national elections were on and the decision would have to be taken by the next government in power.

Talmiz Ahmad, former ambassador to Saudi Arabia and an expert on West Asia, told India Legal: “Our relations with Iran are not focused on oil alone. India and Iran have long-term interests and we cannot reduce everything to a buyer-seller relationship.”

India’s strategic interests involve the Iranian port of Chabahar, which gives Delhi access to Afghanistan and opens up markets in Central Asia. Pakistan does not allow access through its territory for Indian goods to landlocked Afghanistan. The US, however, is not stopping India from expanding and modernising in Chabahar.

America is keen to stabilise Afghanistan and get its troops out of that country. So work on Chabahar can continue. But it is unlikely that Tehran will be interested in doing so at a time when Delhi is choosing to stand with the US on sanctions.

“We need to think through our foreign policy. We need a vision and a strategy to protect our long-term interests,” said Ahmad. “Worry about China is pushing us closer to US, but India needs to deal with China in its own terms. Western powers, despite talk of India’s global status, would prefer to confine Delhi to South Asia, but we need to expand every which way and play an important part in the world.’’ He believes India needs to take a hard look at its strategic interests and lay out its foreign policy vision clearly.

Vandana Hari, founder, Vanda Insights, a Singapore-based provider of macro-analysis on the global oil markets, made the same point as Ahmad on dumping Iran: “Longer-term, India risks jeopardising its relations with Iran by staying away from its oil. Those relations are deep-rooted in history, important for both countries and go far beyond the oil trade.”

Luckily for India, oil prices at the moment are around $70 a barrel. With the world economy slowing down, the demand is not high and there are enough supplies in the world market. Though India buys most of its petroleum from Iran, Iraq, Saudi Arabia and other countries in the region, it has also tried to diversify by buying shale oil from the US. Earlier, some amount also came in from Nigeria, Mexico and Venezuela, but the transport costs are exorbitant due to the distance. So India relies on West Asia for its oil needs.

But Hari said: “India loses on multiple fronts by being forced to halt Iranian crude purchases. These barrels made up around 7 percent of India’s total crude imports for the past six months and a higher proportion before that. Replacement supplies of similar quality crudes are indeed available from Saudi Arabia and some of its Arab neighbours with spare capacity. However, as we have seen from the premiums set by Saudi Arabia and Iraq for their June exports to Asia, the alternatives are coming at a cost.”

Due to banking sanctions imposed by the US for doing business with Iran, India and Iran have been carrying out trade through a rupee account in UCO Bank which has limited exposure in the US. This was done earlier too when Iran was under sanctions. India deposits payments in rupees in Iran’s account for the oil purchased and that is then used to make payments to Indian exporters of goods to Iran.

According to reports, there is around Rs 12,000 crore to Rs 15,000 crore currently in the rupee account. Most of this will have to be paid for oil purchases in the last two months.

Another fallout is that basmati prices in the local markets are crashing because Iran is no longer buying rice. Iran will need this money to buy medicines and other essentials now.

Politically, relations with Iran are bound to plummet as Tehran will keenly watch countries that abandon it in its time of hardship.

According to Hari, India will have to pay what experts term as the “sanctions premium”. Iranian oil was priced lower. She said that Asian refiners are having to pay the price for having provided the biggest market for Iranian crude and now being the most in deficit as a result of the loss of those barrels. Iran was offering crude at bigger discounts and generous credit terms compared with its peers in an effort to retain its markets while under US sanctions, she explained.

India has been buying shale oil from the US. However that cannot replace Iranian oil as Indian refineries are designed to refine petroleum from the Middle East countries.

Shale oil was once touted as the big new find, though it is extremely difficult to extract. It also needs large quantities of pure fresh water sources. Except for the US, few countries have attempted to extract shale oil. And the supplies are expected to dry up in the US by 2025.

Perhaps India will be able to deal with not buying oil from Iran for the short term. But the balancing act which successive Indian governments have succeeded in treading may be difficult with a person like Trump in the White House. His motto, much like that of George Bush after the 9/11 terror strikes would be: “You are with us or against us.”

India has to soon make up its mind on whether it wants to go wholly to the US camp with China in mind or work as it did earlier for a bipolar world together with European partners, as well as China and Moscow. There is a strong lobby in the government veering towards the US.

But there is also a section that is uneasy about moving closer to America. No self-respecting country should be in a position that most of the world is in now. Do business with Iran at your own peril. It is time the world stood up unitedly against Trump on issues such as punitive sanctions which affect not just Iran but countless other countries both in Europe and Asia.

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