Imposition of US sanctions on buying Iranian oil and end of sanction waivers

context:

• India has significantly reduced importing crude oil from Iran following the US move to end sanction waivers, and will use alternate supply sources such as Saudi Arabia and Iraq to make up for the lost volumes.
• Impact of the end of US waivers for imports of Iranian oil was part of discussions between senior Turkish presidential advisor Ibrahim Kalin and India's National Security Advisor. Both of them met recently.
• For India, the decision came as a double blow, as US has also imposed sanctions on its other top supplier, Venezuela.

Background:
Timeline of major events over the timespan of the Iran nuclear deal:

• June 2006: The United States, Russia and China join Britain, France and Germany to form the P5+1 group of nations trying to persuade Iran to curb its nuclear program.
• December 2006: The UN Security Council imposes the first set of sanctions on Iran, banning the sale of sensitive nuclear technology.
• November 2007: The number of uranium-enriching centrifuges assembled by Iran reaches about 3,000 from just a few hundred in 2002. Its stockpile of low-enriched uranium also grows, giving it the ability to, theoritically, make enough-weapons grade uranium for an atomic bomb.
• February 2010: Iran announces it has started to enrich uranium to near 20 percent, a technical step away from weapons-grade material.
• November 2013: Iran and the six powers announce an interim agreement that temporarily curbs Tehran’s nuclear program and unfreezes some Iranian assets. The deal sets the stage for extended negotiations on a comprehensive nuclear accord.
• October 2015: Iran conducts its first ballistic missile test since the nuclear deal. The US accuses Iran of violating a UN Security Council resolution.
• January 2016: The IAEA acknowledges Iran has met its commitments under the nuclear deal, which sees most sanctions on Iran lifted. It takes time but Iran re-enters the global banking system and begins selling crude oil and natural gas on the international market.
• October 2018: US pulls out of Iran nuclear deal unilaterally.

What is Iran nuclear deal?

• It is deal between Iran and six major powers – US, UK, France, Russia, China and Germany and European Union signed in 2015 under which Iran agreed to limit its nuclear program in return for the relief from US and other economic sanctions.
• Limitations imposed on Iran:
  • Iran could only maintain a stockpile of 300 kilograms of low-enriched uranium, compared to the 100,000 kilograms of higher-enriched uranium it once had.
  • It could enrich uranium to 3.67 percent, which can be used to fuel a reactor but was far below the 90 percent needed to produce a weapon.
  • The deal limited the number of centrifuges Iran can run and restricted it to an older, slower model.
  • It asks Iran to reconfigure a heavy-water reactor so it couldn’t produce plutonium and to convert its Fordo enrichment site into a research centre.
  • Under it Iran granted more access to International Atomic Energy Agency inspectors and allowed it to inspect other sites.
• Benefits given to Iran:
  • In exchange, world powers lifted the economic sanctions that had kept Iran away from international banking and the global oil trade.
  • It allowed Iran to make purchases of commercial aircraft and reach other business deals.
  • It also unfroze billions of dollars Iran had overseas.

Why US pulled out of Iran nuclear deal and reimposed sanctions?

• The deal has a provision that fifteen years after the deal, restrictions on Iran’s uranium enrichment and stockpile size will end.
• US argued it allows Iran to build a bomb after it expires, something Iran had explicitly promised in the accord not to do.
• In theory, Iran could have an array of advanced centrifuges ready for use, the limits on its stockpile would be gone, and it could then throw itself wholeheartedly into producing highly enriched uranium.
• US withdrew from the deal in October 2018, and revived a range of sanctions against the countries buying oil from Iran.

Why were waivers given?

• US, however, granted a six-month waiver from sanctions to eight countries - China, India, Japan, South Korea, Taiwan, Turkey, Italy, and Greece.
• Waivers were given to these countries to give them flexibility and time to end their dependence on Iranian oil imports. These countries had showed that they have made important moves toward reducing Iranian oil imports to zero.
• The waiver began in November 2018 and was to expire on May 2.

What are the consequences of sanctions?

• International trade: Imposition of sanctions would hinder international companies working in Iran as they could not access US market for their business activities.
• Oil prices: US sanctions would reduce Iran’s oil exports and put pressure on global markets resulting in rising oil prices. Further in response, Iran has threatened to shut the Strait of Hormuz, a key maritime chokepoint for Persian Gulf producers, a third of the world oil passes through it. This will further reduce the oil supply to the world.
• Nuclear threat: Sanctions would prompt Iran to restart its nuclear programme. It will also affect the denuclearisation efforts taken so far.
• West Asia: The sanctions would aggravate the already existing instability in West Asia. It will further bitter the Iran - Israel and Iran - Saudi Arabia relations.

What are the consequences on India?

• Iran in 2017-18 was India’s third-largest supplier after Iraq and Saudi Arabia and meets about 10 per cent of total needs. The sanctions will significantly reduce the crude supply to India.
• The substitute crude suppliers — Saudi Arabia, Kuwait, Iraq, Nigeria and the US — do not offer the attractive options that Iran does, including 60-day credit, and free insurance and shipping. The challenge is to secure an alternative supplier at competitive terms in an already tightening global situation.
• Current account deficit: Higher crude oil prices will widen the trade deficit and current account deficit, given that the value of imports goes up with crude oil, and that the quantity imported tends to be sticky in general.
• Rupee: The currency could be impacted if the trade and current account deficits were to widen. An increase in the import bill will tend to put pressure on the rupee.
• Inflation: There could be significant impact on inflation, given how crude oil prices move and the extent to which the government allows the pass-through to the consumer.
• Fiscal impact: There could be a two pronged impact on government finances — both on the revenue side and on the expenditure side. On the revenue side, higher oil prices mean more revenue for the states as tax is a percentage of base prices. The expenditure impact would primarily be on account of fuel subsidy outlays-the government has to allocate more funds for subsidy.

Way forward:

• India should make all efforts for a second waiver, keeping in view the close strategic partnership and the new role New Delhi is acquiring in the India-Pacific as a counter-balancing power vis-a-vis China.
• Indian refiners should increase their planned purchases from the Organisation of the Petroleum Exporting Countries (OPEC), Mexico, and even the US to make up for the loss of Iranian oil.
• India should diversify its source of energy from oil to liquefied natural gas and renewable sources like- solar energy, wing energy, hydro power and geothermal energy.

Practice Question:

How will the US sanctions on buying Iranian oil affect the energy and economic security interests of India?