Iran's outreach to India after US exit from nuclear deal faces obstacles

While Iran will likely receive political and trade support from the Indian government, Indian business with exposure to the United States will likely succumb to pressure from Washington.

al-monitor Iranian Foreign Minister Mohammad Javad Zarif and his Indian counterpart, Sushma Swaraj, walk in New Delhi, India, May 28, 2018. Photo by REUTERS/Altaf Hussain.

Jun 5, 2018

On May 28, Iranian Foreign Minister Mohammad Javad Zarif visited India as part of Tehran's broader engagement with world powers following the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA).

In Iran, the visit was viewed as a diplomatic success, particularly after India’s foreign minister said her country would not abide by US unilateral sanctions against Iran. However, things changed shortly after Zarif’s trip. On May 30, India’s Reliance Industries, owner of the world’s biggest refining complex and a main buyer of Iranian oil, announced that it would halt its oil imports from Iran in October or November. The announcement came one day after two Indian banks that are actively engaged in financial transactions with Iran announced they would wind up all deals with Tehran by Aug. 6. Thus, the question is whether Iran can remain optimistic about the future of energy exports and financial transactions with India.

On May 8, US President Donald Trump pulled out of the 2015 nuclear deal and ordered the reimposition of sanctions on Iran in the coming months. "Containment" has long been Washington’s traditional strategy when it comes to Iran, and to advance this strategy the United States has compelled governments and businesses to abide by its unilateral sanctions against Tehran.

Meanwhile, Iran has stepped up its efforts to challenge Trump’s plan. Tehran’s counter-containment strategy involves holding intense negotiations with its key economic partners to preserve its financial and oil-related interactions. Zarif’s recent trip to New Delhi was one example of this.

Tehran’s main interest is to maintain the export of its oil to India, its second-largest Asian buyer after China. In April, Iran’s oil exports hit 2.6 million barrels per day (bpd). That same month, India boosted its imports of Iranian oil to 640,000 bpd, accounting for a quarter of Iran’s total crude exports.

Iranian energy exports also contributed significantly to the $12.9 billion trade volume between the two countries in 2017, although there was a 10% drop compared with 2016. With the start of the 2018 Iranian fiscal year March 21, Tehran offered India the incentive of free shipping in return for New Delhi's commitment to import 500,000 barrels per day of Iranian oil in 2018 and 2019.

It is, therefore, no surprise that when India’s foreign minister said New Delhi would not abide by unilateral sanctions against Iran and Venezuela, Iranian media outlets were all abuzz, calling it a success in the face of US sanctions.

Zarif also described his India visit as fruitful on Twitter and expressed the countries’ resolve to expand bilateral ties in all fields. Deputy Foreign Minister Gholamreza Ansari, who previously served as Iran’s ambassador to India, also reaffirmed the Indian government’s resolute backing of the nuclear agreement.

In the coming months, if New Delhi refrains from implementing the 18-20% cut in its import of Iranian oil called for under the new US sanctions, it will be a great success for Tehran’s counter-containment measures. Also important is whether China, the main buyer of Iran’s oil, also does not cut back on its oil imports from Iran. If India and China do not reduce their imports significantly, Tehran will have a guarantee that at least half its current volume of oil exports will continue.

One issue of contention between Iran and India has been the development of Farzad B, a giant gas field in the Persian Gulf. Negotiations have been going on for years to award India rights to the field, with Iran deferring its final decision. However, in mid-April, Iran’s oil minister said Iran and India may soon be able to finalize the long-pending deal on Farzad B, the most important contract under negotiation between the two countries. The announcement is perhaps an indication that Tehran is willing to show more flexibility toward India to ensure the continued sale of its oil to that country.

However, Reliance Industries’ announcement of an impending halt to Iranian oil imports indicates that New Delhi’s promise to maintain the current level of oil purchases will face many challenges in the coming months. In 2017, Reliance imported on average 67,000 bpd of oil from Iran, with this figure surging to 96,000 in January and April this year. Its latest decision will lower Iran’s oil exports to India by about 15%; this is a figure that oil importing countries, as noted above, are expected to abide by under US sanctions.

Whether India can fulfill its promise of continuing to import a large quantity of Iranian oil will also greatly depend on the European Union and the path it presents for maintaining trade with Iran. Financial transactions aside, European companies must provide insurance coverage for the tankers exporting oil from Iran to India. This was an important sticking point prior to the signing of the JCPOA, since neither India nor Iran were able to provide full insurance for the oil tankers.

Receiving payments for the exported oil is another challenge Tehran will face if it succeeds in maintaining its oil exports to India. During the previous round of sanctions, receiving payments was one of the major difficulties, with India paying part in euros and part in rupees. This method of payment adopted during the administration of Iranian President Mahmoud Ahmadinejad has been described by some Rouhani administration officials as humiliating. Therefore, finding new methods of payment that are acceptable for Tehran will also be very challenging in the months ahead.

It's not just oil; India is Iran’s seventh export destination. In the Iranian year 1396 (which ended March 20), Iran exported $2.735 billion worth of non-oil goods to India. Preserving these exports and especially a mechanism for payment is very important for Tehran. In this vein, the announcement made by the two Indian banks following Zarif’s trip with Iran that they would halt Iran-related business from Aug, 6, which coincides with the start of the US sanctions, is worrisome for Tehran.

In addition to being India’s third-largest oil supplier, Iran is also the Indian gateway to Afghanistan and to the center of the Shiite world. Iran also is an important geographical region in the newly emerging Eurasia — a place where Beijing’s growing influence is becoming a source of concern for New Delhi. More importantly, and perhaps contradictory to US policy, is that India and the US-backed Afghanistan government share an interest in the development and expansion of the Chabahar port in southeastern Iran; many argue that the development of Chabahar should be a US policy goal. These factors may be enough to keep Tehran optimistic about its oil and commercial trade with New Delhi.

Of course, it remains unclear to what extent New Delhi’s support will impact the actions of Indian companies when it comes to trading with Iran. However, what is clear is that large Indian companies such as Reliance Industries, which have immense interests in the US and world economy, will likely abide by Washington’s sanctions, just as their Chinese and European counterparts will. However, state-owned and small- or medium-sized enterprises may continue their interactions with Iran. Therefore, while Tehran can be hopeful about New Delhi’s support for trade and investment, Indian business leaders can be assumed to side with Washington. 

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