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How Will Sanctions on Iran Affect India?

In this edition of The Interview, Fair Observer talks to Sumitha Kutty, an associate research fellow at the S. Rajaratnam School of International Studies in Singapore.

Iran and India have traditionally maintained cordial relations, counting on each other as major security partners. Bonds between the two Non-Aligned Movement heavyweights have strengthened ever since the 1990s when they supported the Northern Alliance in Afghanistan against the Taliban regime. In 2003, they announced the establishment of a “strategic partnership” and have subsequently cooperated on energy, trade, counterterrorism, defense and intelligence operations.

It was after the signing of the Joint Comprehensive Plan of Action — aka the Iran nuclear deal — that Tehran multiplied its oil exports to the Indian subcontinent and became New Delhi’s second biggest oil supplier. According to Reuters, India received about 457,000 barrels per day (bpd) of Iranian crude in the first three months of the 2018 fiscal year. This is in comparison to 279,000 bpd between April and June 2017.

India has a vital interest in the development of the Chabahar Port in the Sistan and Baluchestan province of southern Iran. As Iran’s only oceanic port, Chabahar is a strategic route that connects Iran, Afghanistan and India and will completely bypass Pakistan. India took over the operation of the port in December 2018.

Yet all is not well with Iran and India. The recent announcement by the US government that it will not renew waivers for Tehran’s major oil clients, including India, to buy Iranian crude means New Delhi will have a tough job maintaining its longstanding trade and energy relations with Iran.

In this edition of The Interview, Fair Observer talks to Sumitha Kutty, an associate research fellow at the S. Rajaratnam School of International Studies, Nanyang Technological University in Singapore, about the implications of US sanctions for Iran-India relations.

The transcript has been edited for clarity.

Kourosh Ziabari: How will the latest US sanctions on Iran affect trade between Iran and India?

Sumitha Kutty: Trade between India and Iran stands at around $12 billion and in Iran’s favor, owing to its crude oil exports that meet India’s ever-growing energy demand. India imports close to three-quarters of its crude oil, and about 10% of this is met by Iran.

Under the first six-month waiver granted by the US government, India could import up to 300,000 barrels a day. This was about half of what it previously purchased in the period after sanctions were lifted. The recent decision of no more waivers and a sharp reduction in imports will only make it harder for the Indian government to meet its planned imports for the year —an election year, too. Higher intakes of Saudi or Iraqi oil have not proved enough to replace Iranian crude, which brings with it more favorable credit terms and lower prices than available substitutes. In addition, retrofitting state-owned refineries that process Iranian crude in order for it to process any other kind is an expensive affair. A bulk of India’s refineries are state-owned and this cost would have to be borne by the government.

India mainly exports rice and tea, and Iran’s continued interest in imports is closely tied to India’s decision to continue oil imports. The two states have established a rupee-rial payment mechanism to continue trade under unilateral US sanctions.

Ziabari: The new US policy toward Iran is to bring oil exports to zero. Iran is a major supplier of India’s oil, and New Delhi was granted a temporary waiver to continue buying Iranian oil at a limited rate. With no new waivers, what do you think India will do to meet its energy demands? Will it stop importing crude from Iran?

Kutty: The Modi government’s official reaction to no waivers has been rather muted. Officials say Indian refineries were prepared for this outcome and the country has alternate supplies lined up to fill the gap. This is true to an extent since New Delhi pushed and cautioned refineries to expect such an eventuality. All orders of Iranian oil for May were put on hold earlier.

In recent years, the government has also invested a lot of energy into its interactions with the Arab Gulf states, particularly Saudi Arabia and the United Arab Emirates, who have stepped up exports to assist India. India has also increased imports from the US in the same period.

Despite these moves, the country is certainly feeling the pinch now, given recent American sanctions on a second crude supplier, Venezuela. Elections are also underway in India now, making this quite the inopportune moment for a double whammy of this kind. 

Ziabari: Does India feel the urge to abide by the sanctions, which are unilateral and not endorsed by the UN Security Council and the European Union?

Kutty: India is keen to preserve its close partnership with the US but — like any other state — prioritizes securing its own interests. It has to strike the right balance here and manages to do so with some bargaining and accommodation. The Modi government’s official position is that it only recognizes UN-endorsed sanctions. The previous Indian government also held the same stance. Any Indian government has to sell its position to a domestic audience first. Even though, in practice, India has met the US halfway by adjusting its imports and non-essential interactions with Iran.

What helped New Delhi in the past was that the Obama administration did not define what “significant reductions” entailed. That has now changed with Donald Trump’s push for zero. The move has certainly irked New Delhi, given its strong belief in strategic autonomy. It has always maintained this position even as it works closely with the US on aligned interests.

Ziabari: It was reported that India was able to receive an exemption from Washington’s secondary sanctions for the development of the Chabahar Port in southern Iran. How crucial is this port to India’s security and economy, and why is it important for New Delhi to maintain its autonomy over it? 

Kutty: The development of the Chabahar Port and connecting it to Afghanistan matters to India as it helps it gain access to the Afghan and Central Asian markets — bypassing Pakistan. It also provides Kabul with access to the sea and more options to trade with India and within its own region without overt dependence on Pakistan.

The first exemption on the Chabahar project was an acknowledgment by Washington of its strategic partner’s interests. India officially took over operations of the port from December 2018 through a state-owned vehicle in partnership with an Iranian port operator. This is not to sweep away the fact that unilateral US sanctions have greatly impeded India’s investment plans in the port. For instance, the project failed to garner interest from private Indian firms.

Washington’s denial of an exemption would be viewed negatively in India and termed foreign interference in its strategic interests vis-à-vis Afghanistan and Iran. It will not go down well with the Indian public, and this will matter to the next government, irrespective of who wins the election. The new Indian government would not want to appear as negotiating from a position of weakness in its dealings with the US. 

Ziabari: How do you think Iran-India relations will develop under the shadow of the new US sanctions and the possible of collapse of the Iran nuclear deal? Is India facing a tough choice over preserving its traditionally robust relations with Iran amid pressure from the US?

Kutty: India’s dealings with Iran have primarily revolved on energy, but from around 2012 onward, the idea of working on connectivity along with Afghanistan gained momentum. With no US waivers and India’s acquiescence, the energy component of this bilateral is clearly not the main pillar of this relationship. A second exemption from the US for Chabahar would keep India’s connectivity plans alive. The US should view this project as complementing its Afghan strategy and promoting the country’s trade and economic security. New Delhi will have to make the hard decision of whether it will protect its own interests on this matter if no exemption seems forthcoming from the Trump administration.

Ziabari: Iran has made it clear that it will not negotiate with the Trump administration. This comes despite Tehran and Washington talking to each other under President Barack Obama. What are the prospects of a détente between the two countries? Will things get better or will the escalation of tensions make any rapprochement impossible?

Kutty: The US has only doubled down on its policies to isolate Iran since it walked out in violation of the nuclear deal last year. It seems clear that the current administration would like to see Iran quit the nuclear deal on its own accord. This could also set in place an antagonistic Iran policy for the foreseeable future in Washington even if a different leader or party came to power in the next US elections.

On its part, Iran has naturally responded strongly against renewed sanctions and the denial of waivers. It has declared the US as a “state sponsor of terrorism” and its troops in the region as terrorists after Washington designated the IRGC [Islamic Revolutionary Guard Corps] as one. There is increasingly very little room left for diplomatic maneuvering by either side now.

Ziabari: The Joint Comprehensive Plan of Action was the outcome of months of intense negotiations and committed diplomacy. Now that it has been scrapped by the US, do you know of any better alternative that Washington might be looking for?

Kutty: The unfortunate reality is that the alternative the US talks about — i.e., negotiating a nuclear-arms deal, including restrictions on missile development — is something Iran has not been willing to discuss in the first place. Talk of such a deal is dead in the water.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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