U.S. ENDS WAIVER FOR INDIA ON IRAN OIL
23, Apr 2019
Prelims level : International Mains level : GS-II Governance, Constitution, Polity, Social Justice and IR
Why in news:
- The US has broadly agreed to grant India a waiver from its Iran sanctions recently.
- India was one of eight countries allowed temporary import of Iranian oil since they had made “significant reductions” in oil imports. India was being pushed by the US to restrict its monthly purchase to 1.25 million tonnes or 15 million tonnes in a year, down from 22.6 million tonnes bought in 2017-18.
- India was one of eight countries allowed temporary import of Iranian oil. Last November, US Secretary of State Michael R Pompeo said the US had agreed to exempt eight countries as they had made “significant reductions” in oil imports.
- India, which is the second biggest buyer of Iranian oil after China, is being pushed by the US to restrict its monthly purchase to 1.25 million tonnes or 15 million tonnes in a year (300,000 barrels per day), down from 22.6 million tonnes (452,000 barrels per day) bought in 2017-18 financial year, according to sources.
- But New Delhi had pushed back on zero oil imports, citing adverse impact on its economy and the inflationary fallout it would have.
- Last September, during the Indo-US 2+2 dialogue, the US told the Indian side that it was not in Washington’s interest to damage the Indian economy. External Affairs minister Sushma Swaraj and Pompeo had discussed the issue of oil imports from Iran.
- India is the world’s third-largest consumer of oil, with 85 per cent of its crude oil and 34 per cent of its natural gas requirements being fulfilled by imports. In 2016, India imported 215 million tonnes of crude oil and at 13 per cent, Iran stood third among India’s biggest oil suppliers, after Saudi Arabia and Iraq at 18 per cent each.
- Even during the last set of sanctions between 2012 and 2015, India had continued to import oil from Iran. Although the value of oil imports had dipped from USD 11.6 billion in 2011-2012 to USD 4.3 billion in 2015-16, it had again climbed up to USD 8.9 billion in 2017-18.
Why did the US withdraw from the Iran deal?
- The JCPOA, known commonly as the Iran nuclear deal was a preliminary framework agreement reached in 2015 between the Islamic Republic of Iran and a group of world powers. (P5+1)
- The U.S. withdrew from the multilateral deal, known as the Joint Comprehensive Plan of Action (JCPOA), citing a security threat.
- It has reimposed sanctions on Iran that it lifted just two years ago.
- This was intended to restrain Iran’s behaviour beyond nuclear controls and to choke the Islamic Republic’s biggest source of income and pressure it to renegotiate a new nuclear deal. U.S. has laid out conditions Iran must meet to ease sanctions, including ending destabilizing actions in the region, such as its support for Houthi rebels in Yemen and Hezbollah. However, Iran regard these demands as tantamount to seeking regime change in the country. Hence the US decided to withdraw from the JCPOA, reinstating two sets of sanctions, wherein the first includes restrictions on –
- Iran’s purchase of U.S. currency
- Iran’s trade in gold and other precious metals and
- The sale to Iran of auto parts, commercial passenger aircraft, and related parts and The second set of sanctions, which comes back into force on November 4, restricts sales of oil and petrochemical products from
- Thus any country, or company, trading with Iran without US consent after sanctions kick off risks getting cut off from the American financial system.
What are the resultant effects?
- The U.S. moves have contributed to a run on the rial and triple-digit inflation as Iranians scramble for the safety of U.S. dollars and gold.
- U.S. has so far rejected requests by foreign governments and companies that would allow them to continue to conduct business with Iran.
- European signatories of the JCPOA are reported to be preparing a package of economic measures to try to salvage the deal.
- The European Union also proposes a law to protect EU companies doing legitimate business with Iran from the impact of US extra-territorial sanctions.
- Despite this, if other parties to the JCPOA are unable to continue their revived business with Iran, Iranian leaders are expected to walk away from the deal.
Why India demanded for a waiver?
- For India, the impact of the American sanctions plan would be manifold, regardless of the waiver. India prefers Iranian oil as it comes cheap and suits many refineries’ technical configuration.
- Given that Iran is India’s third largest supplier, there are not only rising costs of oil to contend with, but also the added cost of having to recalibrate Indian fuel refineries that are used to process Iran’s special crude.
- The second impact would be on India’s investment in the Chabahar port, which would face both direct and indirect sanctions as shippers, port suppliers and trading companies refuse to participate in the project. Hence India and other key importing countries have been engaged for months requesting US for a sanction waiver.
- The US on its part insisted that it wanted everyone to reduce oil imports from Iran to zero eventually, but was open to country-specific waivers that would allow limited imports by those pledging ‘significant’ cut. Hence the recent U.S. statement says that eight countries would be exempted from the waivers which are believed to be US allies like India, Japan, Italy, and South Korea.
What are the Takeaways?
- The waiver dampens fears about a shortage of supplies and sending crude prices to their lowest levels in three months.
- It would allow Indian oil companies to continue to import about 1.25 million tonnes of oil a month till March from Tehran.
- India and the US have broadly agreed on a waiver, wherein India will cut import from Iran by one-thirds of its volume.
- India had imported about 22 million tonnes of crude oil from Iran in 2017-18 and planned to raise that to about 30 million tonnes in 2018-19.
- But, as a condition of waiver, Indian oil firms will reduce their imports significantly.
- The waiver comes as a big relief to Indian Oil and MRPL, the two largest Iranian oil consumers. However, the US sanctions have already driven away Indian and international shippers and insurers from extending their services for Iranian oil imports.
- Refineries using Iranian oil have also faced insurance issues during renewals in recent months. Also, the U.S. has said that it is only issuing temporary waivers, and the waivers are strictly linked to the condition that countries receiving them keep cutting down their purchases from Iran.
- Along with the JCPOA-linked sanctions, India continues to face sanctions linked to the CAATSA, which puts more strictures on dealings with Iran, Russia and North Korea. Thus the waiver is therefore no magic wand to be wished for, as it only pushes the problems for India down the road.
Why Iran is more than just an Oil Supplier to India?
- Iran ensures overland connectivity between Eurasia and India and it is not just an energy supplier. Iran is a land power on the other side of Pakistan that provides India with an alternative route to Afghanistan, a strategic necessity for Delhi.
- Iran is a geopolitical entity in its own right. Iran has borders with a large number of countries that India could not access because of the barrier that Pakistan posed to India’s overland connectivity plans. India’s relationship with Iran has been built carefully and thoughtfully by all past governments as Iran for India is not just an energy supplier from the Persian Gulf region.
- India’s infrastructure-building activities in Afghanistan is done with support from Iran.
- India has disregarded political inclination of the government in Tehran with an eye on the overall necessity of the country for India’s strategic security.