Section: International Relations
Title: Iran Sanctions
Relevance: GS 2
Why has this article been published?
India is caught in the middle of a conflict between the US and Iran. With the latest round of US sanctions on Iran, India is looking at various options to ensure that its relations with both countries, and particularly its energy interests are not affected.
How US sanctions on Iran can affect India?
The US government has made it clear that any country that continues to do business with Iran will be blocked from accessing the American banking and financial system.
India-Iran relation not confined to oil
Not only is Iran India’s third largest source of crude oil, but both countries have ties that go beyond energy trade. These include India’s investment in developing the Chabahar port in Iran, a strategic factor in its access to Afghanistan as well as with respect to the International North South Corridor (INSTC) which aims to facilitate linkages to Central Asia and Russia.
India’s options
- Given that Iran accounts for around 10 per cent of India total oil imports, the immediate factor for New Delhi will be to look at various options to deal with the situation without jeopardizing its energy security.
- The issue of payments will be the most contentious. If no agreement on an alternate mechanism for funding is reached, India may cut or stop buying oil from Iran.
- As in the past, India can continue to buy oil from Iran in non USD currencies. If the Europeans do not succumb to US pressure, India can trade oil in euros; alternatively, it can re-introduce the rupee-rial payment mechanism used earlier.
- Recently, Iran warned India that the “special privileges” given to it would end if it tried to replace Iranian oil with supplies from other sources. Iran further hinted that India’s other interests related to connectivity with Iran would also suffer.
- With regard to alternatives to Iranian oil for India, other oil producers can fill the gap if it stops or cuts its Iranian oil imports. Given India’s huge and growing market for oil, it certainly has other alternatives to source its oil imports, and has in fact begun looking at alternate supplies, including from other Gulf producers, Canada and the US. However, it may not get the preferential terms it did from Iran.
- With Iranian oil supplies decreasing in the international oil market, it would impact on prices worldwide, and will add to India’s ballooning oil import bill.
Conclusion
Eventually, whatever decision the government takes, will be based on ensuring that the country’s energy needs are not jeopardized, which includes gaining access to oil without further hurting its energy security or economy.
