Iran oil import issue to hit India-US ties

  • 01-May-2019
  • Iran oil import issue to hit India-US ties

The US recently announced that it would not extend sanctions waivers for Iran oil importers, claiming all oil buyers will have to end imports from Iran or be subject to US sanctions after May 2. Given that Iran is an important energy and trade partner of India, the US move will highly likely affect US-India ties.

India relies on imports for 80 percent of its oil demand. Before the US withdrew from the Iran nuclear deal, Iran was India’s third largest oil supplier. Previously, the US has granted exemptions to India, according to which, as of March 2019, India had to restrict its monthly oil purchase from Iran to 1.25 million tons, equivalent to 70 percent of what India had been importing from Iran before Washington quit the Iran nuclear deal. This is bearable for India.

More importantly, by importing oil from Iran, India saves around a quarter of combined costs due to favorable conditions such as prices, transportation and insurance. Based on the deal of exemptions, the Iranian oil should not be traded in US dollars, lest Iran’s export earnings be used to finance international terrorism. India has to pay Iran in rupees for oil imports. The sum of money is deposited in a special account in India. Iran uses it to purchase humanitarian supplies such as rice and medicines from India. For India, this situation worked to its advantage.

Judging from the current political situation in the US, the country is unlikely to compensate India economically. US oil exporters hope to take the opportunity to expand oil exports to India. However, their trade terms are not attractive while the trade volume is limited. Nor does India want its energy security to be navigated by the US.

Therefore, once the sanction waiver expires, India’s oil import costs, its US dollar payouts will rise and its export revenue will decrease. By then, India’s economic growth and exchange rate’s stability will be under great pressure.

In addition, if the US tightens sanctions on Iranian oil exports, it will push up international oil prices, thereby increasing India’s overall oil import bills. Once India’s economic interests are impaired, India-US relations are sure to be hurt.

Moreover, cooperation between the US and India on issues such as Afghanistan will be impeded. India-Iran relations transcend the oil trade. The two nations also share a long-term strategic consensus on issues such as Afghanistan and Pakistan. Iran hopes to strengthen its ties with Afghanistan.

Similarly, India also hopes to reach out to Afghanistan through Iran and extend its influence to Central Asia. According to The Economic Times, India has “committed $3 billion in assistance to Afghanistan since 2001,” so as to cultivate Afghan’s goodwill toward India.

In addition, India is investing in Iran’s Chabahar port in order to build a new link between India and Afghanistan through the port and to have more connections between the two countries.

Now, the US has announced its withdrawal of troops from Afghanistan, which jeopardizes Afghanistan’s stability and India’s investment in the country. Moreover, US sanctions would severely stymie cooperation between India and Iran over the port of Chabahar.

All that is likely to undermine the relationship between India and Iran, thwart US-India defense cooperation on Afghanistan as well as counter-terrorism efforts that started since the September 11 attacks.

The divergences between US and India on Iran are impairing their strategic relations and mutual understanding. India maintains close military cooperation with the US and is involved in Washington’s Indo-Pacific strategy.

However, policy changes by the US on the Iran nuclear issue make India worried about Washington’s real interests, long-term strategy and uncertainty in ties with the US. Many Indians believe that the US does not care for India’s interests and strategy, but merely intends to use New Delhi to contain Beijing. They say India is a strategic pawn of the US but not an equal partner. There is resentment among certain Indians because the US has demanded that India cut ties with Iran, but keeps providing assistance to Pakistan without considering India’s feelings.

In fact, since last year, India has begun to distant itself from the US Indo-Pacific strategy and reverted to its strategic independence and autonomy. India’s frosty relations with Russia and China have also improved. Probably, US-India relations will only be normal and sustainable under multilateral framework.

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