Implications of US sanctions on Iran

With presidential elections due later this year, the US President, Mr Barack Obama, has to be seen to be acting “tough” on Iran's nuclear ambitions. The Iranians haven't helped their own cause by threatening to “wipe out” Israel and supporting radical Arab groups like Hamas and Hezbollah. Virtually, all of Iran's Sunni Arab neighbours also fear Iranian intentions, and share international concern on the want of transparency in its nuclear programme.

With Iran threatening to shut the vital sea lanes of the Straits of Hormuz in the event of being attacked, Israel and the US appear to have been persuaded that military strikes would be counterproductive. Moreover, American National Intelligence Estimates have concluded that Iran is still one to three years away from assembling a nuclear weapon. President Obama has, therefore, acted continuously to tighten sanctions on Iranian oil exports.

IRANIAN OIL EXPORTS

On December 31, Mr Obama approved US legislation imposing sanctions on foreign banks dealing with Iran's Central Bank, by channelling payments for Iranian oil exports. Within weeks, the European Union followed suit, imposing sanctions on oil imports from Iran. These sanctions will come into effect on July 1.

EU members like Greece, Italy and Spain will be adversely affected by these sanctions. Debt-ridden Greece is likely to seek exemption, given its large exposure to oil imports on favourable terms from Iran. Within Asia, the major importers of Iranian crude are China, India, Japan and South Korea. Iran is China's third-largest supplier, at 500,000 barrels per day. Moreover, China has committed huge investments in the oil and gas industry in Iran. India has been hit hard by expanding western sanctions on Iran's oil and gas sector. Refined petroleum products are our largest foreign exchange earner in our foreign trade.

Iran is a major importer of refined petroleum products, and exports to Iran from the Reliance Oil Refinery in Junagadh have been progressively reduced, in the face of American sanctions on exports of refined petroleum products to Iran. This is primarily because Reliance Industries, like most of our large industrial enterprises and financial institutions, have substantial business and financial interests in the US.

Towards the end of 2010, the US worked with its European partners to close avenues for payments using European Banks, which India was making to Iran, through the Asian Clearing Union, for its oil imports. Cornered, India had to look for Banks across the globe for oil payments to Iran, with agreement finally being reached for payments through Turkey's Halkbank in July 2011.

Anticipating the tightening of sanctions on Iran's oil exports, India has worked to quietly reduce its exposure to Iranian oil imports, which are likely to fall to an estimated 13 million tonnes in this financial year, from 21.2 million tonnes barely two years ago. In the wake of improving relations after the visit of King Abdullah, India is reported to have received assurances from Saudi Arabia that it would be happy to meet any shortfalls we may face.

EXPLORINg ALTERNATIVES

The Saudis are also reported to have given China similar assurances. China has been particularly pro-active in dealing with the emerging situation, with Premier Wen Jiabao visiting Saudi Arabia, Qatar and the UAE earlier this month. Wen's visit to Saudi Arabia led to a Chinese investment of $8.5 billion in an oil refinery, which will process off-shore oil for shipment, through a pipeline bypassing the volatile Straits of Hormuz. Similar investments by China are envisaged in Abu Dhabi.

India will now have to move imaginatively and expeditiously to devise new arrangements for payments for Iranian oil imports. Statements by Halkbank representatives indicate that Turkey will fall in line by July 1, with American and EU banking sanctions on Iranian oil exports.

One option for India would be to see if payments are possible through Russia, which is the largest oil producer today globally, through a Bank like the Gazprom Bank, which has financial dealings with Iran.

But there are reportedly indications that while Russia may support Iran against unilateral American sanctions, it may not like to directly undermine western sanctions. Another possibility is to consider using our currency swap arrangement with Japan for Iranian oil payments. But this again may prove unworkable, given the fact that Japan itself has formally asked the US for a six-month waiver of sanctions on its oil imports from Iran.

While a rupee trade arrangement with Iran may be ideal, it remains doubtful if such an arrangement is possible, given the fact that the rupee has been the worst-performing Asian currency in 2011. Moreover, the viability of such an arrangement may be limited, given the huge trade deficit we have with Iran.

We should seek new methods, including the use of Indian banks which don't have exposure to American markets and financial institutions, for routing payments for oil imports from Iran.

Moreover, given the uncertainties on American policies and security presence in Afghanistan after 2014, Iran, which is our primary gateway to Afghanistan and Central Asia, will be a crucial partner in safeguarding our interests in Afghanistan, as it was in the years preceding the ouster of the Taliban Regime. The Iranians, in turn, will have to be advised to be more transparent on their nuclear programme.

(The author is a former High Commissioner to Pakistan.)

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