After ripping up a nuclear agreement with Iran, Trump is forcing India and a host of other Asian nations to end imports of crude from the Islamic republic by ending exemptions from sanctions for countries still buying oil from Iran.
The White House on April 22 announced that waivers for China, India, Japan, South Korea, and Turkey to purchase oil from Iran would expire in May, after which they could face US sanctions themselves if they fail to oblige.
May 2 marked the end of an era of discounted oil trade between these countries and Iran. India was the second largest buyer of Iranian oil after China.
Why is US doing this?
By tightening sanctions on Iranian oil exports and lifting trade waivers for the chief importers of Tehran’s oil, the US hopes to cripple Iran’s economy enough for popular unrest to rise against the existing power structures and bring the nation to its heel, or at least, an acceptable nuclear deal.
The US, of late, has taken a number of measures and policy approaches to get under Iran’s skin. It branded the country’s Revolutionary Guards a foreign terrorist organisation and sanctioned 14 individuals and 17 entities linked to Iran’s sketchy Organization of Defensive Innovation and Research recently.
US sanctions, imposed first in August, prohibited Iranians from trading in gold, aluminium and steel; it also saw many European companies back out for fear of sanctions. Oil sanctions began in November, following which foreign shipping lines started backing out of Iranian deals under pressure from US sanctions.
Trump’s policies have since cut Iranian oil exports by about 1 million barrels per day. Analysts now expect the Islamic republic’s exports to fall by another several hundred thousand barrels per day.
How’s Iran taking it?
Not too well and certainly not backing down.
Besides designating the US army as a foreign terrorist organisation last month, Tehran threw a curveball at Washington this week, threatening to partially withdraw from the existing nuclear agreement.
The accord was aimed at curbing Iran’s nuclear ambitions in return for sanctions relief; it was brokered by Barack Obama in 2015 and has had its efficacy questioned time and again by Trump, who believes it is too lenient on the Iranian nuclear programme.
Tehran on Wednesday hinted it may increase uranium enrichment, suspending key commitments under the deal’s Joint Comprehensive Plan of Action (JCPOA), a year after it was abandoned by the US.
President Hassan Rouhani said he will no longer sell enriched uranium stocks abroad, conveying his decision to the remaining parties of the deal—France, Germany, Russia, China, and the UK. He also threatened to resume production of higher enriched uranium in 60 days, if they failed to meet their financial and oil commitments to the deal.
Rouhani was very clear about what happens if these nations follow US sanctions or refer the nuclearisation case to the United Nations Security Council. “Iran would begin higher enrichment of uranium, which is currently capped, and begin developing its Arak heavy water reactor based on plans made prior to the deal,” BBC reported the Iranian leader as saying.
US-Iran tensions have been on the rise ever since Trump abandoned the nuclear deal last year, but the latest foreign policy targeting Iran’s oil-dependent economy has further escalated tensions between the two nuclear powers.
Reports that the US has deployed a US aircraft carrier in the Gulf region, following Secretary of State Mike Pompeo’s unscheduled meeting in Iraq, has piqued fears of armed conflict. During the visit, he accused Tehran of transporting short- and medium-range ballistic missiles aboard boats in the region, much of which falls within Iranian territorial waters or the country’s Exclusive Economic Zone. According to CNN, the US may send additional firepower, including anti-missile defence systems to the region.
The end of exemptions over importing oil from one of the most important OPEC members also stands to destabilise the global economy.
According to Iran’s oil minister, the OPEC is threatened by unilateralism and “likely to collapse” due to Trump’s oil gamble. In a thinly veiled remark aimed at US allies in the 14-nation group, Bijan Zangeneh said, “Iran is an OPEC member just for its interests, and if certain OPEC members want to threaten and endanger Iran, Iran will not refrain from responding to them.”
But the Trump administration has said there is enough oil from the US, Saudi Arabia, and the United Arab Emirates, who have agreed to offset the drop and fill the void. Producers, however, know that stepping up to replace that amount of oil is easier said than done.
Qatar, too, has threatened to quit the OPEC, following similar grievances over sanctions from Saudi Arabia that has choked all its trade, ports, and waterways. With political turmoil engulfing most oil-rich nations like Algeria, Angola, Libya, Nigeria, and Venezuela, the embargo on trade with Iran is highly likely to result in surplus demand and inflationary trends across the world.
Furthermore, if Iran carries out its threat to blockade the Strait of Hormuz, or if oil stops flowing from other hotspots, like Libya and Venezuela, “Oil could hit $100 a barrel or more; about 0.6% could be wiped off global growth this year, and inflation could rise by 0.7 percentage points,” reports Al Jazeera.
How this affects India
For India, which had to stop purchasing oil from the Middle Eastern country from May 2, a larger problem looms. If Oil Minister Dharmendra Pradhan’s assurance of a “robust plan for adequate supply of crude oil to Indian refineries” does not ring true, that is because India was the second biggest customer of Iranian oil, which satisfied nearly 10% of our oil needs.
Then, there is the question of Iranian oil suiting Indian refineries and coming with the longer 60-day credit period and cheaper freight.
While the US is working to ensure adequate oil supplies from the UAE, Kuwait, Mexico, Dubai or Saudi Arabia to India, it will not be able to ensure the discounted rates Tehran offered.
That is because the commodity, at least in the US, is controlled by private companies, which would make it difficult for the government to force them to export at concessionary prices, US commerce secretary Wilbur Ross admitted on Monday.
How the oil spills over into an economic crisis
The threat of this loss has been real since November 2018, when Trump decided to end the exemptions to tighten leash around Iran last year but made a leeway for India and seven other nations, noting their dependence on Iranian oil and by the virtue of diplomatic ties the US shares with India. However, the catch was: India could import only 300,000 barrels per day until April. Last year, Indian ports hauled in an average 552,000 bpd of Iranian oil.
Now that the six-month waiver has ended, a difficult road lies ahead as India prepares for life without Iranian oil.
According to Reuters, India’s oil imports, which stood at 24 million tons in 2018-19, fell about 57% year-on-year in April, the last month when New Delhi was allowed to load Iranian oil ahead of US sanctions stopping purchases.
Since November, when India received the sanctions waiver, only state-run Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum, and Mangalore Refinery and Petrochemicals have been buying Iranian oil.
The period also coincided with the lacklustre performance of the rupee and a spike in petrol and diesel prices, owing largely to Trump’s tariff war with China and sanctions on Iran.
Oil topped $74 a barrel on Monday, its highest in six months on fears of shortage due to expected removal of supplies from Iran. Washington, however, said the sanctions, aimed at pressuring Iran to curtail its nuclear programme and renegotiate with the US will not hurt global oil supply.
The reality, however, portends to a bleak future. After North Korea, Iran has not only become another site of Trump’s failing strategies at denuclearisation, but the consequences of playing hardball with Tehran are more immediate, far-flung, and economically dire.
Under current circumstances, an alternate channel of payments like INSTEX—instituted by European nations to bypass and soften the blow of US sanctions last year—ought to be empowered to cover oil trade as well. That could salvage Iran’s unravelling economy, crude-dependent markets like India, and whatever’s remaining of the 2015 nuclear deal.
Prarthana Mitra is a Staff Writer at Qrius.