Indo-Iran Trade Transactions at Crossroads After US Sanctions

The unilateral sanctions the US is anticipated to reimpose on Iran in August and November have made the situation worse for India, as oil imports from Tehran are expected to become more complicated and difficult.

The United States recently pulled out from the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action, signed between Iran and five permanent UN members (the US, Russia, Britain, France and China) plus Germany.

Though these sanctions have opened up a small window of opportunity for India to step up bilateral trade, one would be “too naive” to think New Delhi could step up exports, HDFC chief economist Abheek Barua told DNA Money.

“Unlike last time, it (the sanction) is very complicated this time,” Barua said, emphasizing it has come at a time when there is a full-blown trade war between the US and China.

This trade war could trigger mutually assured economic destruction, which is not good for global growth, now on a revival mode after years of global recession.

The United States has already threatened to impose sanctions on India and any stepping up of trade with Iran will make the situation worse for New Delhi.

Retaliatory US action could be severe, even though Indo-US relations have been improving, analysts said.

Oil prices are already rising because of Trump’s dismantling of the Iran nuclear deal. The United States too witnessed an increase in fuel prices, which could backfire in his domestic constituency as well.

India imports a large quantity of oil from Iran, perhaps nearly 10% of its crude oil requirement. India imports a little over $100 billion worth of crude oil, accounting for nearly 80% of its oil needs.

So, any sanction on any of the oil importing countries will be disruptive for the Indian economy. The volatility in the exchange rate of rupee is an indication that all is not well with the global economic situation with trade war worsening.

US sanctions on Iran have started hurting India as freight fees for Iranian oil have started increasing because many of the foreign shippers are reluctant to carry Iranian oil. But this has also thrown a new opportunity to get into shipping services to facilitate Iranian oil imports.

India is already looking at seeking exemptions from Washington to buy Iranian oil apart from working out alternative payment mechanism to protect India-Iran trade, which is $12-13 billion annually.

The terms of trade are heavily loaded in favor of Iran. India imports close to $9 billion worth of oil from Iran. India exports around $3 billion worth of goods to Iran, which is mostly basmati rice, medicines, chemicals and engineering goods.

During the previous round of sanctions on Iran, India was allowed to make part payment to Iran in rupees under a kind of barter deal. Indian refiners used to route all their oil payments through SBI and a German-based bank. India was allowed to make up to 45% of its trade in euro and 55% in rupees.

Iranian Foreign Minister Mohammad Javad Zarif visited New Delhi recently in this connection. He had a fruitful meeting with Indian External Affairs Minister Sushma Swaraj.

Oil, expectedly, is going to be one of the most heavily affected commodities for buyers and sellers dealing with Tehran.

Swaraj has already indicated India will continue trading with Iran and Venezuela despite US sanctions against the two countries, asserting that it only recognizes UN restrictions and not country-specific sanctions. This does not make the situation any better for India with the trade war becoming nearly full blown.

Ajay Sahai, director general of the Federation of Indian Export Organizations, a trade promotion organization in India, said the impact of US sanctions will be known only after August 5, the time provided to work out the details.

“It all depended on what sort of formula is worked out,” Sahai said.

Both Iran and India would be happy if the same formula is worked out.

Meanwhile, Indian exporters are gearing up to ensure that transactions are mostly in euro so that they are not caught off guard when dollar payments become virtually impossible after August 5.

“How the situation pans out, we will have to wait and watch till sanctions crystallize,” he said.