“Blow hot, blow cold” has been the relationship between India and Iran since the first round of sanctions by the West on the Islamic nation. But, can India turn the latest announcement by American President Donald J Trump that the United States will pull out of the Joint Comprehensive Plan of Action – Iran nuclear deal – into an advantage as far as trade ties with Iran is concerned?
Yes, it can, believe those in the energy business as well as those who have trade ties with the Islamic Republic. Though most are still waiting to read the fineprint.
“Iran, which hardened its negotiating position in the recent past, will be on a sticky wicket now and this allows Indian companies to get better terms for deals,” said Saurabh Chandra, former Secretary in the Ministry of Petroleum & Natural Gas. But, even if trade ties are established, it will throw other challenges, including issues pertaining to payment and transportation — banking, insurance, and shipping.
The challenges
In fact, the pressure of the earlier US sanctions on Iran is so evident that Indian refiners were compelled to shift their attention to other crude oil producing nations. The import numbers of 2011-12 had revealed that Iran which was India’s second-biggest crude oil supplier after Saudi Arabia had lost its position to Iraq.
India had cut it supplies from Iran slowly and steadily to the point that it slipped to seventh position. However, after the sanctions were lifted in 2015, oil trade from Iran picked up again and soon Iran became the third largest supplier after Iraq and Saudi Arabia.
One of the deterrents was the mode of payment and transportation. In the earlier round also there was a big challenge for the ships getting crude from Iran to get insured as most of the big insurance players were either American or have significant business interest in America.
Also, most of the international trading business is done in dollar. India had faced challenges in paying for its trade with Iran. Though a rupee payment mechanism was worked out, its success was much debated.
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Rising oil prices
Besides, it will also fire oil prices, which is already breaching the earlier forecasts. According to the information available, the forecasted price for Brent crude oil for 2018 varies between $60 and $70 a barrel. The price at which Indian refiners sourced their crude on May 8 stood at $73 a barrel, putting pressure on the fiscal math of the Indian government.
Voicing his concern, Chief Economic Advisor Arvind Subramanian, in his Economic Survey, had said the persistently high oil price (at current levels) remains a key risk for the country and it would affect inflation, current account, fiscal position, growth, and force macroeconomic policies to be tighter than otherwise.
He further noted that the average oil price as forecast by the International Monetary Fund will be 12 per cent higher in 2018-19, which will crimp real incomes and spending — assuming the increase is passed on as higher prices, rather than absorbed by the Budget through excise tax reductions or by the oil marketing companies.
The oil industry would prefer a stable price or a ‘goldilock range’ between $60 and $70 a barrel. Goldilock range is the price range at which both the seller and buyer are happy.
“Oil markets hate such sanctions, uncertainties and anxieties. The US will try to bring some stability in crude prices, and luckily the demand supply landscape is also manageable, still it is volatility which will rule the markets in the coming months. The US sanctions against Iran will create several new problems for large emerging economies, including India,” Narendra Taneja, leading energy expert.
Geo-political risks
But, are the sanctions anything to do with the oil producers trying to jack up the prices? Should we read the proposed IPO of Saudi Aramco IPO as one of the reasons?
Highlighting the risks, the CEA in his Survey had said, there are the usual geo-political and geo-economic risks: war in the Korean peninsula; political upheaval in West Asia; aggressive output cuts by Saudi Arabia (and Russia) in advance of the planned listing of the Saudi Arabian oil company, Aramco, which could force oil prices even higher.
However, many see it as Trump’s local politics to do away with whatever his predecessor Barack Obama did. Sanctions were lifted by Obama.
No impact on Basmati
For India, however, there is a deal to develop the Chabahar port in Iran, giving it better access to Central Asia and the region. And, also, the decision on commercial contract for Farzad B gas field. “Most of the Indian companies are now having interests in America and other nations. So one has to wait and watch how many will touch projects in the sanction-hit nation,” said a trade analyst.
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While awaiting more clarity on the emerging developments, the Indian basmati rice exporters are hoping that like in the previous instance, food and medicines, would be excluded from the US trade sanctions on Iran.
"There's unlikely to be any impact on our basmati exports to Iran," said Gurnam Arora Joint Managing Director, Kohinoor Foods Ltd and past president of the All India Rice Exporters Association.
Iran is the largest buyer of India's basmati rice and accounted for 22 per cent of the four million tonnes of total shipment of the aromatic rice during 2017-18. Basmati shipments to Iran are currently on and the rupee payment mechanism that came into existence between the two countries in early 2012 was still active.
“Let us wait and watch the fine print. India is in a better bargaining position now,” said an oil industry expert.
(With inputs from Vishwanath Kulkarni in Bengaluru)