Lifting of Sanctions from Iran: What it means for India

International sanctions against the Islamic Republic of Iran were lifted on January 16, 2016, after the International Atomic Energy Agency, the international nuclear watchdog, announced its verification of steps taken by Iran to comply with the July 2015 accord. Coinciding with lifting of sanctions, Iran has announced the release of five Americans as part of a prisoner swap deal with the United States.

What is the nuclear deal?

Iran and the six world powers {i.e. P5+1 or US, UK, France, China and Russia plus Germany} had signed the historic Joint Comprehensive Plan of Action (JCPOA) in July 2015. United States believes that the deal will prevent Iran from acquiring nuclear weapons whereas Iran says that it has the right to use nuclear energy for peaceful purposes.

The key nuclear sites of Iran include Arak, Bushehr, Gachin, Isafahan, Natanz, Parchin, Fordo and Qom. Out of these, two viz. Natanz and Fordo are uranium enrichment facilities. Here, uranium can be fed into centrifuges to produce most fissile isotope U-235. Low-enriched uranium, which has only 3-4% concentration of U-235, can be used to produce fuel for nuclear power plants. But enriched uranium can be used to produce nuclear weapons. Under the JCPOA, Iran has to limit its installation of centrifuges at Natanz for 10 years. Iran’s nuclear stockpile should also be reduced by 98% to 300 kg for 15 years and Uranium enrichment must be kept at level of 3.67%. For the next 15 years, Iran will have 24 days to comply with any IAEA access request. By January 2016, Iran has reduced its number of centrifuges installed at Fordo and Natanz and tons of low-enriched uranium was shipped to Russia.

What Iran stands to gain from the deal?

Iran is facing sanctions from the UN, EU and several other countries since 2002 when its nuclear programme became public. The sanctions include ban on supply of nuclear related technology and heavy weaponry, ban on purchase of crude oil and natural gas from Iran, ban on any transactions with Iranian banks and financial institutions, an asset freeze on key individuals and companies etc.

These sanctions have crippled economy of Iran. It is suffering from double-digit inflation and high unemployment rates for most of the past decade. Since 2012, the sanctions had cost Iran approximately $160 billion in oil revenue. The lifting of sanctions would allow Iran to gain access to more than $100 billion assets frozen overseas. Iran will resume its selling of oil on international markets and can use global financial system for trade. Iran can boost its GDP growth to around 5% in 2016-17 from the present zero per cent.

What lifting Iran sanctions means for world markets?

The removal of sanctions will allow Iran to increase its crude oil exports by 5,00,000 barrels per day. This would further reduce the global oil prices which are already at historic low due to oversupply in the market. Iran is the 4th largest oil producer in the world. However, Iran return as an oil supplier could trigger a price war with its rival Saudi Arabia, which is protecting its own markets by selling oil at below market price.

Iran India Relations in the light of Sanctions

India and Iran are good trading partners since the first decade of the twenty-first century. The trade was dominated by exports of hydrocarbons from Iran to India. Indian companies were also interested to invest in Iran’s oil and gas fields. For example, an Indian consortium had signed an initial agreement to invest in Farzad-B gas field in 2008.

After 2010, commercial relations between India and Iran became more complicated with imposition of sanctions. India continued its trade with Iran by importing Iran’s oil but the share of Iran in India’s oil imports decreased. Some makeshift arrangements such as payment in Indian Rupee instead of Dollars and Euro were done as Iran’s banks faced international sanctions and they could not transfer their oil exports income from India. Iran deposited the money in Indian banks used it for making payments to import of Indian goods including rice, wheat, auto parts, etc. India became an important exporter to Iran along with China, Turkey and U.A.E.

However, Iran was discontented with its limitations and growing imbalances after falling of Indian Rupee against U.S. dollar. Indian companies had also withdrawn from investing in Iran’s oil and gas fields. The Iran-Pakistan-India (IPI) gas pipeline could not materialize and India showed interest in development of TAPI gas pipeline.

India-Iran relation after lifting of sanctions on Iran

The removal of sanctions on Iran has significant implications on commercial and trade relations between India and Iran. India stands to gain from Iran’s extra oil production. Development of Farzad-B gas field, investment in Chabahar port, and an undersea gas pipeline could potentially increase the mutual cooperation.

Cheaper oil for India

The lifting of sanctions will allow Iran to produce more oil to compete with its rival Saudi Arabia. Till 2010-11, Iran was India’s second biggest supplier of crude oil after Saudi Arabia provided around 12% of India’s oil needs. But after sanctions, Iran became seventh largest supplier to India. Iran has already announced that India will be the main destination for Iran’s oil exports in 2016. Lower oil prices in the global market from Iran’s increased production would boost India’s economic growth. India can also fill its strategic oil reserves to avoid future price escalation if any. But India has to change its present payment mechanism to Iran. Iran wants to receive its exports receipts in U.S. Dollars or Euro. It would be better if India resumes its payment through USD or Euro at the earliest.

Investment in oil and gas sector

The lifting of sanction on Iran could provide an opportunity for India to renew its interest in investing in Iran’s vast gas sector. Earlier, the ONGC Videsh Limited (OVL) was involved in discovery of Farsi gas field in 2008. But due to economic sanctions, Indian companies did not invest in development of ‘Farzad B’ gas field. In 2013, Iran decided to withdraw the production sharing contract given to Indian companies in developing Farzad B gas field. Iran also decided to auction the Farzad B field. However, after signing of JCPOA agreement by Iran in July 2015, India tried to convince Iran to offer development of Farzad B field to the Indian consortium again. After India’s concerted effort, Iran asked Indian consortium, led by the OVL, to submit a new development plan for Farzad B gas field. Iran is expected to receive a comprehensive proposal including swapping plans of Farzad B’s gas with natural gas produced by other fields and transfer of surplus gas to India by constructing a pipeline.

Chabahar port and undersea gas pipeline

Iran’s coastline is located at the conjunction between Central Asia, West Asia, and Afghanistan. It gives India an opportunity to access the landlocked Afghanistan and Central Asia’ markets through Chabahar port in Southeastern Iran. Pakistan’s Gwadar port, which is took over by China for development is geographically located close to Chabahar port. Since 2003, India sought to construct the Chabahar Port but the economic sanctions become a major hurdle. Iran provoked India by offering development contract of Chabahar port to China. When the signs of reconciliation between Iran and western powers appeared in 2015, India expressed again its interest to be engaged in Chabahar port project. Although Iran initially rejected India’s proposal, political considerations, as well as commercial interests, encouraged Iran to accept India’s proposal. During the end of 2015, India also extended credit line for Iran to fund its 630-km rail project from Chabahar port to Zahedan. But India has been slow on implementation aspects.

Iran is also interested to promote an undersea pipeline project, known as the Middle East to India Deepwater Pipeline (MEIDP), as an alternative to IPI pipeline. The pipeline starts from Chabahar port and ends at Porbandar in South Gujarat of India. It passes through Sea of Omen to Omani coast.

End Notes

The ending of sanctions on Iran would expect to have a mixed result on relations between Iran and India. India stands to gain from increased crude oil supplies from India. The commercial relations are also expected to resume their normalcy. However, by terminating the Rupee based payment mechanism, India is set to lose its market in Iran. While India has been slow on its commitments in strategic economic projects in Iran, China has emerged as Iran’s strategic commercial and largest trading partner. In recent years, Chinese companies invested heavily in Iran and occupied the space vacated by Western companies. However, India’s active diplomacy in revival of development plan of Farzad-B project, investment in Chabahar port, and cooperation on potential MEIDP can broaden the strategic cooperation between the two countries.