Why USA has ameliorated Indian oil import scenario?

The Trump administration has granted exemptions to eight countries, including Japan, India and South Korea, to continue importing Iranian oil since they have made significant reductions in oil imports from Iran. USA has said that countries like India will be further asked to bring down oil imports from Iran to zero in six months.

Countries that get waivers under the revived sanctions must pay for the oil into escrow accounts in their local currency. That means the money won’t directly go to Iran, which can only use it to buy food, medicine or other non-sanctioned goods from its crude customers. The administration sees those accounts as an important way of limiting Iranian revenue and further constraining its economy.

Now the question arises is whether bypassing the sanctions from Iranian and Indian side has more weight or gifting soft policies by allowing eight economies to continue trade with Iran has more weight? For USA trade relations with major economies in 2018 so far has not been mollified mainly with China as there had been continuous retaliations in terms of increasing importing tariff rates. Can we say that by allowing eight significant economies including India to continue trade with Iran for a limited time, USA want to gain some favour?  Let’s try to explore the scenario.

Oil is Iran’s main source of income and is also the third-largest producer among the Organization of the Petroleum Exporting Countries (OPEC). In 2018, so far Iran exported about 2.7 million barrels per day. Through its sustained pressure, the US has managed to reduce Iran’s oil exports from 2.7 million to 1.6 million barrels a month, according to internal US estimates. The sanctions also come at a time when Iran is already in the grip of an economic crisis. The rial now trades at 145,000 to $1, compared with 40,500 to $1 a year ago. The economic chaos prompted mass anti-government protests at the end of last year that resulted in nearly 5,000 reported arrests and at least 25 people being killed.

In addition, the Brussels-based Swift network for making international payments is expected to cut off links with targeted Iranian institutions, isolating Iran from the international financial system. The measures will mainly affect Iranian companies in direct business with other foreign firms. Saudi Arabia, the leading player of the OPEC committee, has said that it would fill in for the lost supply.

India, which is the second biggest buyer of Iranian oil after China, is being pushed by the US to restrict its monthly purchase to 1.25 million tonnes per month or 15 million tonnes a year (300,000 barrels per day), down from 22.6 million tonnes (452,000 barrels per day) bought in 2017-18 financial year. At present India has pushed back on zero oil imports citing the adverse impact on its economy and the inflationary impact it would have.

The European Union, France, Germany and Britain said in a joint statement that they regretted the US decision and would seek to protect European companies doing legitimate business with Tehran. On the other hand, China denounced the new US sanctions as long-arm jurisdiction and promised to continue its bilateral trade with the Islamic republic.

Beyond Crude Oil Trade

The payment system with Iran is being relaxed further for basmati rice exports. This comes after the US allowed India to continue importing crude oil from Iran and develop the Chabahar port. India is now finalizing guidelines for exporting basmati rice to its largest importer Iran, on a rupee payment basis. The move has come as a positive development for exporters who are paying a higher price for procuring basmati.

Last year, India exported $4.17 billion worth of basmati rice and Iran was the largest buyer (at $905 million). In the first five months of 2018-19, exports have already crossed $2 billion and Iran continuous to be the largest buyer for India followed by Saudi Arabia. When the US announced sanctions against Iran, farmers had already increased area under basmati but exporters were cautious. However, the recent exemption for Iran followed by easing of the payment crisis has lifted the sentiments of basmati exporters. Iran normally opens its market for basmati import by mid-November after taking into account its domestic production and demand matrices.

India is also bullish about the prospects of the Chinese market, although it basically imports non-basmati rice varieties now. Recently, a buyer-seller meet was organized in China, where five-six Indian rice exporters had participated even as the country approved 24 domestic rice millers.

However, the Chinese basmati market would still take some years before it ‘matures’ for domestic exporters. China is the world’s largest producer and importer of rice and procures about 5 MT every year. India has estimated a potential sale of one MT of rice to China. The country planned to boost rice and sugar exports to narrow the trade gap with China. Recently, five new rice mills were cleared for exporting non-basmati rice to China, taking the total to 24 rice mills. In May 2018, Chinese officials had inspected rice mills capable of exporting non-basmati rice. Meanwhile, basmati exporters have also been exploring other markets like the US, European Union and Latin America. Yet, the results have not been encouraging.

West Asia, China and Iran may be big importers. As a result of high export demand and lower-than-expected crop the market is bullish. It appears that US’s pressure won’t exacerbate India’s import of oil as USA is not in its best position in terms of controlling or influencing trade directions.