U.S. President Donald Trump’s decision to reimpose sanctions on Iran will not only hit the dynamics of the global oil trade, it will also force India to relook at its ties with the middle eastern nation.
While details of the economic sanctions are still to be released, Trump said that the U.S. will be “instituting the highest levels of sanctions” against Iran. “Any nation that helps Iran with its quest on nuclear weapons could also be strongly sanctioned by the United States,” said Trump on Tuesday.
India is not expecting a major shift in trade due to the Iran sanctions, Bloomberg News quoted India’s commerce secretary Rita Teotia as saying.
However, an adjustment in the quantum and mechanism of India’s trade with Iran is inevitable if sanctions that existed before 2015 are reimposed. These restricted the quantum of oil imports from the nation as also the use of the U.S. dollar for trade with Iran.
Since the sanctions were lifted, India has increased its dependence on Iranian crude. According to data from the commerce ministry, crude oil imports from Iran accounted for about 6 percent of India’s total oil imports between FY14 and FY16. This proportion has nearly doubled and Iran now accounts for more than 10 percent of India’s oil imports, shows the data.
If quantitative restrictions on imports are reimposed, import volumes may come down.
“In light of the latest development, Indian refineries, buying crude from Iran, will be forced to scale down imports from Iran and source more from other countries,” K Ravichandran, Senior Vice President at ICRA told BloombergQuint. A shift in the source of crude could impact margins and working capital requirements for Indian refiners as Iranian crude is priced at a discount compared to crude of comparable quality sourced from elsewhere, Ravichandran said.
Moreover, Iran offers longer credit period as compared to 30-day period which is the norm among other exporters. Hence Indian refiners’ working capital borrowings will increase to that extent.K Ravichandran, Senior Vice President, ICRA
According to a DBS report released on Wednesday, China and India are the two largest importers from Iran, together accounting for 1.4 million barrels per day. As a result of these sanctions, both nations may look for options, said DBS.
China may hasten the use of the Chinese Yuan to continue importing from Iran while India may resort to looking for waivers from the US or going back to using a mix of barter and gold to settle payments, DBS said.
India could also look at switching to Rupee trade to some extent, said Saurabh Chandra, former Secretary, Ministry of Petroleum and Natural Gas.
“When sanctions were imposed earlier, problem was in payment. Part of payment went via rupee trade and part of the payment went via Euros. I can’t comment on whether we can go back to the same mechanism for payment as sanctions are yet to be imposed,” said Chandra.
Broader Trading Ties
While oil accounts for 80 percent of the imports from Iran, India does maintain export ties with the nation as well. For the year ended March 2018, imports stood at $11.11 billion, shows data from the commerce ministry. Exports to Iran stood at $2.65 billion.
Rice is one of the larger items of exports. Iran along with Saudi Arabia account for nearly 40-45 percent of India’s basmati rice exports, according to rating agency ICRA.
“As far as rice is concerned, it is a staple food in Iran and that is why it will be out of the sanctions,” Anil Mittal, chairman and managing director of the company, told BloombergQuint earlier today. “In the past too, whenever there are sanctions on any country, essential food items are out of the sanction,” he said citing the examples of North Korea and Sudan.