India's Iran oil problem has only been half-solved thanks to US waiver

The US last week announced that while sanctions would be re-imposed by the Trump administration on the Islamic Republic of Iran for supposedly firing up its nuclear programme — and in reality because President Donald Trump wished to escape a deal signed by his predecessor — the sanctions programme would include significant waivers for at least eight countries. While these did not include the European Union, major trading partners with Iran, they did include the Asian oil importers of India, China, South Korea and Japan. For India, this will come as a significant relief and the government is to be credited for the careful diplomacy that has made this exemption possible. Announcing the waivers, US Secretary of State Mike Pompeo said the eight countries had “demonstrated significant reductions in their crude oil [imports from Iran] and cooperation on many other fronts”. All of the eight would have to re-apply to extend the waiver after six months. These sanctions follow the earlier re-imposition in August of sanctions on financial transactions, and for commodities such steel and coal. Fortunately, the US has backed away from the possibility of forcing the SWIFT inter-bank transfer system to comply with the financial sanctions — this would have sped up efforts to create an alternative transfer system, and would have led to an unfortunate Balkanisation of the global financial system.

The waiver is significant for India because it is Iran’s third-largest customer for crude oil, and several refineries in India are dependent on fuel from Iran. However, this dependency has been considerably reduced since the sanctions were first imposed before the Iran deal some years ago. Dependency on Iranian oil has been brought down by over 20 per cent. But it will be difficult to bring it down further. However, the problem — as before — is not that India can continue to buy Iranian oil, but how it will pay for its purchases. To the extent that they can be paid for in rupees, the problem is perhaps soluble — but any purchases in rupees will eventually have to have an equivalent amount of exports from India to Iran on the other side of the ledger. This is not easy to manage, as the Iranian market for Indian goods has not expanded sufficiently — rice trade, for one, would have to go up considerably. The financial sanctions imposed by the US on institutions dealing with Iran severely complicate other forms of payment. It is possible, perhaps, to use a bank such as UCO Bank — which does not have major interactions with the US financial system — to manage payments.

But even if these transactional problems are overcome, others remain. For one, how will shipments of oil from Iran to India be insured? Major reinsurers in the US as well as Lloyds of London, which is the organisation most often used for such reinsurance, will have to comply with the sanctions. This problem is yet to be solved. It will perhaps need the use of new re-insurers, perhaps from the Chinese financial system. While the government has won a reprieve for India, the task of finding a mechanism to secure oil imports from Iran is only half completed.