Why India's real Iran dilemma isn't oil

Discussion in 'Foreign Relations' started by nrj, Jan 30, 2012.

  1. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

    Nov 16, 2009
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    Barack Obama signed into effect the Iran Threat Reduction Act on December 31, 2011. That Act bars foreign banks from the US if they conducted transactions with the Central Bank of Iran (CBI), a move intended to choke off Iran's oil incomes, its main source of revenue.

    The law calls for US financial sanctions on anyone settling oil trades with CBI, and comes into effect from June 28. The exceptions are White House-blessed waivers or a very tight oil market.

    This week, European Union (EU) ambassadors announced their own Iran oil embargo. From July 1, Europe, which takes in about 600,000 barrels per day (bpd) from Iran, will close its market. This decision was taken despite fierce opposition from Greece, which gets a lot of its debt repayment from Iran in oil.

    Payment Problems

    India's life just got more complicated. India is Iran's third largest oil importer after China. In December 2010, the Reserve Bank of India (RBI), fearing US sanctions on India's financial sector, had walked out of the Asian Clearing Union that cleared Iran's oil payments.

    This started a merry-go-round as India scoured the world to pay Iran for its oil and simultaneously tried to reduce its dependence on Iranian oil. India began to use one of its small nationalised banks with little or no exposure to the West, to pay for the oil.

    The first stop was Germany's EIH Bank, but in a few months that stopped. Turkey's Halkbank has been processing India's payments to Iran since then, though there were palpitations when Halkbank refused a BPCL application. This week, Halkbank stated that it remained open for business for India.

    Can India Handle It?

    As of now, India's payment options are fairly varied. Some goes through barter, offset against Iranian imports, mainly tea and some jewellery, some in rupee trade (RBI needed a lot of convincing) that may be utilised in building Indian investments in Iran or vice versa; some perhaps, in a currency like yen (though the Japanese may not agree) and a large sum through Turkey until that stops.

    According to some diplomatic sources, Iran had asked India for yuan as a trading currency. But that's unacceptable to India. There's also wild talk about Venezuela or even Brazil to route Indian payments. But India is not even going down that path. After an Indian delegation travelled to Iran to discuss oil imports, oil minister Jaipal Reddy said India would buy oil from Iran because the terms were "favourable", euphemism for Iran sweetening oil deals for India.

    Non-Iran Suppliers

    Meanwhile, India has been reducing oil imports from Iran, ever since Saudi Arabian King Abdullah's January 2006 visit here. Iraq, which is rejoining the global oil market, is also a big oil source. Then there is Nigeria, though internal problems there may impact its capacities soon.

    Thus, there is unlikely to be an oil supply problem in the world, despite the IMF hyperventilating about a "supply shock". Between the Saudis, Iraqis, Libyans and Russians there is enough extra oil, close to 1 million bpd more oil may be coming from these producers alone. Besides, the 600,000 bpd that Iran currently sells to the EU will soon be free for countries with the nerve and muscle to ignore sanctions.

    Nukes, Pakistan & Sanctions

    At the heart of the problem is Iran's ambition to build a nuclear weapon. The West opposes it, Israel opposes it, India and China oppose it. As far as India is concerned, an Iranian nuclear weapon will instantly trigger a Saudi response. Riyadh has sponsored the Pakistani nuclear programme, and there is every expectation that it will call in its IOUs from Islamabad.

    The Pakistan army, the nation's most toxic and powerful institution, will get a fresh lease of life, because its "Islamic" bomb may then become available for all Shia Iran's enemies in the Sunni world, for significant consideration. This is a set of very bad outcomes for India.

    Sanction Impact on India

    On Oil Companies: Reliance, which sells fuel in the US, has stopped buying Iran crude. State-run oil companies with primarily home operations would not like to abruptly shut out Iran.

    On Oil Prices: Hard to estimate. Brent Crude rose to $110 per barrel. Depends on non-Iran oil flow and geopolitical tensions.

    On Oil Subsidies: No direct effect. If prices are low, oil companies can charge international rates. If prices are high, the government will step in. So, a crisis will probably push up subsidies.

    On Oil Refineries: Reliance has already shifted to non-Iran suppliers. State-run firms have reduced Iranian imports over the years. MRPL, the biggest buyer of Iranian crude, said this week that it is concerned and keeping all options open

    But as a past sufferer of international sanctions, India, like China, fundamentally dislikes them. They end up penalising the poor citizen, but keep elites in business. We can expect that a further set of UN sanctions against Iran would die at the hands of China and Russia.

    Who'll Talk To Tehran

    There is also an immediate security concern. Iran controls the strategically important Strait of Hormuz, through which over one-fifth of global oil flows. The US and UK have already sent in six warships to keep these lanes open. For the moment, Iran says it won't choke off that point, but when sanctions start to bite, could that change?

    What if Sanctions Don't Work?

    Iran has lost four nuclear scientists to targetted assassinations in the past couple of years. And in 2010, the "Stuxnet worm" created havoc inside Iran's centrifuges. We have no way of knowing the true extent of damage, but that the programme was set back was clear.

    Iran though is determined to get a nuclear weapon, despite all it's protestations to the contrary. In conversations with the Indian leadership, Iranians said they took away a couple of lessons from current events.

    Muammar Gaddafi, who gave up his nuclear programme to the West, died in a "West-imposed" conflict. But North Korea's Kims (the late father and the successor son) remain untouched despite them being serious nuclear bad boys. That, Iranians said, was because North Korea has the nuclear device. The world needs a different narrative if Iran has to be weaned away from its nuclear dreams.

    Why India's real Iran dilemma isn't oil - The Economic Times
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