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International Relations

India chooses discounted Iranian crude and says 'no' to the US

Trump deputies silent on oil ban after foreign and defense officials' meeting

India is actually expanding its economic ties with Iran by increasing its oil imports.   © Reuters

NEW DELHI/TOKYO -- Caught in the crossfire between the U.S. and Iran, India is trying to manage relations on both fronts. New Delhi refused to fully comply with U.S. sanctions reimposed on Iran in an inaugural ministerial dialogue between the countries' top foreign and defense policymakers on Sept. 6, creating a potential source of friction.

Internal politics were largely behind India's decision to spurn the U.S. request for a ban on oil imports from Iran. Indian Prime Minister Narendra Modi cannot afford to bow to the demand and allow domestic energy prices to rise.

During the meeting in the Indian capital, Washington and New Delhi agreed to expand defense cooperation to counter China's military expansion in the region but failed to find common ground on the Iran sanctions.

India is actually expanding its economic ties with Iran. It is not only increasing its oil imports from the country but making infrastructure investments in it.

So the stage is set for a U.S.-India tiff as Washington seeks to isolate Iran and New Delhi befriends the big oil exporter.

U.S. President Donald Trump in May decided to withdraw from an international deal designed to limit Iran's nuclear program in exchange for easing pressure on the country's shaky economy. The Trump administration has announced plans to reimpose economic sanctions against Iran and has called on other countries to cut their oil imports from the country to zero by early November.

When Secretary of State Mike Pompeo recently visited India, one of his objectives was to secure India's participation in this zero-tolerance regime.

From left, U.S. Secretary of Defense James Mattis, U.S. Secretary of State Mike Pompeo, India's Foreign Minister Sushma Swaraj and India's Defense Minister Nirmala Sitharaman pose after a joint news conference  in New Delhi on Sept. 6.   © Reuters

A U.S. State Department official on Aug. 30 spoke to reporters before Pompeo's arrival. "We know that India and other countries around the world certainly share our concern about the urgency of addressing the full range of Iranian malign behavior," the official said. "And we're looking for ways to remain closely engaged with India in finding a way forward to end Iran's destabilizing behavior."

After Pompeo and Defense Secretary James Matiss met with their Indian counterparts, however, no reference to the Iran sanctions was made, neither in the joint statement nor the joint news conference.

"They must have definitely discussed Iran," said Harsh Pant, director of the Observer Research Foundation, a New Delhi-based think tank. "But they could not let the focus be on that."

India indicated its unwillingness to go along with the U.S. sanctions.

"India," Pant said, "has made very clear [to the U.S. that] India cannot bring its imports [of oil from Iran] to zero."

Another factor behind New Delhi's reluctance to play ball with Washington is Iran's growing importance to the Indian economy.

India imported $82.1 billion worth of crude oil in 2017, according to U.N. statistics. Iraq accounted for $15.2 billion worth of the total, becoming India's largest oil supplier. Saudi Arabia was No. 2, at $14.3 billion, and Iran came in third, at $9.2 billion.

Iran's share in India's oil imports swelled to 11% in 2016, from 5% to 7% until 2015.

The increase was a result of the nuclear deal engineered by former U.S. President Barack Obama. The accord lifted international sanctions on Iran. It also led India and Iran to launch a joint development of the strategically located Iranian port of Chabahar.

The Chabahar port is vital to India's long-term plan to secure trade routes to Central Asia that do not pass through neighboring Pakistan, the country's archrival.

The port is also important to India's defense strategy as China and Pakistan expand their military ties.

Against this geopolitical backdrop, India and Iran have been closely cooperating in the economic and security realms. In this, Iran's surging oil exports to India play a big role.

Lowering its dependence on Iranian oil would challenge India's energy security.

India depends on crude imports to meet over 80% of its oil demand. It might be able to cut out Iran by buying more Saudi or Iraqi oil, but these options could be more expensive.

And Modi faces crucial elections in April and May, when a second term as prime minister will be at stake. In this environment, keeping a lid on oil prices is a political no-brainer.

Iran is also trying to ensure that India remains a major purchaser of its oil. Iranian Heavy, one of the country's main grades of crude, is priced 90 cents lower per barrel than Arabian Medium, a similar Saudi crude, for September shipments.

The price difference between the two grades has tripled over the past year; market players say Iran is offering discounts to retain customers.

According to the terms of an interim agreement signed by the two countries, Iran will be ready to hand over operations of the strategic Chabahar Port to an Indian company within one month. Abbas Akhoundi, Iran's minister of roads and urban development, reasserted this in front of reporters in New Delhi on Sept. 6, following a meeting with his Indian counterpart, Nitin Gadkari.

K.P. Vijayalakshmi, a professor at Jawaharlal Nehru University in New Delhi, believes India did not completely reject the U.S.'s demand but needs time to find alternatives. "I have been told that India is looking at [other sources of oil imports]," she said. India may have to follow the U.S. sanctions, she added, if the U.S. is making a serious proposal. "But," she said, "that will become clear only later."

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