Indo-Iran trade ties at a crossroads after US sanctions

The unilateral US sanctions on Iran has made the situation worse for India, as oil imports from Tehran are going to become more complicated and difficult. United States, which alleged nuclear weapons programme by Tehran, pulled out unilaterally recently from the Iran nuclear deal, which is a Joint Comprehensive Plan of Action (JCPOA) between Iran and five UN permanent members and Germany. The five permanent UN members are US, Russia, Britain, France and China.

Though these sanctions have opened up a small window of opportunity for India to step up bilateral trade as Iran being traditionally friendly country and an Asian neighbour, one would be "too naïve" 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 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 action by the US president could be severe, even though Indo-US relations have been improving, analysts said.

This is the first time such a US sanction has been imposed on Iran. The previous one a few years ago was UN imposed sanctions on the same nuclear weapons issue. 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.

Hardly a few weeks old, US Sanctions on Iran have started hurting India as freight for Iranian oil has 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 in a big way that will facilitate Iranian oil imports but also trade from elsewhere.

A former senior economist in the finance ministry, H A C Prasad, who has published papers on how to step up merchandise and services exports, said that shipping is one of the services, which had huge potential to expand. Indian shipping liners carried hardly 10% of its total trade. Though Indian shipping was opened to foreign direct investment (FDI) as early as 2002, not much investment has poured for want of shipping reforms, including changes in archaic shipping laws.

Lately, shipping has become one of the focus areas of reforms of Prime Minister Narendra Modi. This is however not a short-term opportunity. 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 favour 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, drugs, chemicals and engineering goods.

During the previous sanctions on Iran, India was allowed to make part payment to Iran in rupees under a sort 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.

Recently, Iranian foreign minister Javad Zarif visited New Delhi recently in this connection. He had a fruitful meeting with external affairs minister Sushma Swaraj. There are already indications that US President Donald Trump may look at the possibility of the US Congress legislating more sanctions on Iran. Oil, expectedly, is going to be one of the most heavily affected commodities for buyers and sellers dealing with Tehran.

Sushma Swaraj has already indicated India will continue trading with Iran and Venezuela despite US sanctions against the two countries, asserting that it only recognises 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 Federation of Indian Export Organisations (FIEO), a trade promotion organisation in India, told DNA Money the impact of the US sanctions will be known only after August 5, the time provided to work out 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 spans out, we will have to wait and watch till sanctions crystallize," added Sahai.

BARRIERS AHEAD

• India is already looking at seeking exemptions from Washington to buy Iranian oil apart from
   
• The volatility in the exchange rate of rupee is an indication that all is not well with global economic situation with trade war worsening.