Author : Vivan Sharan

Originally Published 2012-04-20 00:00:00 Published on Apr 20, 2012
The problem with imposing sanctions on a country which has the world's third largest proven reserves of oil and second largest conventional natural gas reserves is that the implications are felt globally. The price of oil is highly correlated throughout the world due to market arbitrage.
The BRICS view on Iran: India's motivations
The recently concluded BRICS Leaders Summit in Delhi yielded comprehensive and progressive outcomes on a number of important issues. Besides being able to achieve consensus on significantly deepening the intra-BRICS cooperation agenda with emphasis on market based integration, BRICS Leaders for the first time, were also able to coherently express views on sensitive foreign policy issues including on the Arab-Israeli conflict, the Syrian imbroglio and the contentious Iranian nuclear programme. Through the Declaration, BRICS members have recognized Iran’s right to "peaceful uses on nuclear energy consistent with its international obligations". The Declaration has also unambiguously stated that BRICS members do not support "plurilateral initiatives that go against the fundamental principles of transparency, inclusiveness and multilateralism". The BRICS position on Iran’s sovereign rights and the respect of international law is an unequivocal rejection of interventionist policies outside of the UN framework. It is interesting to briefly examine India’s motivations for adopting such a firm policy stance given its simultaneous proximity to powers such as the U.S and the EU.

For decades, Iran has faced multiple sanction regimes, for allegedly sponsoring terrorism and for developing a nuclear programme with the intent to make nuclear weapons. The U.S has led such efforts, following a fairly predictable model of incrementally imposing unilateral sanctions each time Iran’s governance apparatus has been less than deft in handling its foreign policy priorities and messaging. This default model of response has been used by the U.S administration since the Islamic Revolution, which led to the overthrowing of the Shah of Iran, a close ally of the West. Sanctions have been used by the U.S to achieve highly ambitious foreign policy goals, which history proves, are hard to achieve without simultaneously establishing economic and political synergies (South Korea) or the blatant use of force (Iraq). Repeatedly, studies have shown that sanction regimes cannot work in isolation of comprehensive strategies for engagement. Yet, there has been little or no will to explore alternatives and with the Jewish lobby at Capitol Hill, the policy hostility towards Iran will be hard to reverse.

The problem with imposing sanctions on a country which has the world’s third largest proven reserves of oil and second largest conventional natural gas reserves is that the implications are felt globally. An important characteristic of the global oil market is that it is an integrated market. The price of oil is highly correlated throughout the world due to market arbitrage. This means that plurilateral initiatives by the U.S or the EU to curb Iran’s economic viability by imposing barriers on the free flow of trade and finance are in effect paid for by all net consumers of oil, including developing countries such as India. Iran’s production capacity has also been more or less stagnant for many years at around four million barrels per day. Sanctions have prevented Iran from accessing technology to upgrade oil infrastructure and increase supply, which would theoretically ease oil prices. This is a perverse and fundamentally flawed dynamic. Why should the developing world pay for the foreign policy interventions of the West? Why should India, a country with over 800 million poor and stark levels of energy poverty, subsidise American and European foreign policy and in turn face insurmountable fiscal deficits year after year?

India and Iran share historical ties, and there is definite cultural affinity between the two nations. However, these are not the reasons why Indian policymakers have supported the seemingly ideological stance taken by BRICS members. India imports around 12 percent of its oil from Iran, its second largest supplier after Saudi Arabia. While in a globally integrated oil market, import substitution should theoretically be fairly simple, Iran sells oil to India based on long term supply contracts that offer a competitive rate. Moreover, many of the PSU refineries in India are geared towards the processing of sweet crude oil which is imported from Iran. Mangalore Refineries and Petrochemical Limited (MRPL) and Hindustan Petroleum Corporation Limited (HPCL) in particular are two large PSUs whose profit margins depend to a significant extent on the sweet crude mix imported from Iran. While the private sector, including Reliance, has been fairly quick to respond to the political risk and diversify imports, the public sector understandably cannot adapt as fast (Essar Oil is the private sector exception which was the largest importer of Iranian Crude in the first quarter of 2012). India is certain to continue importing oil from Iran and only the relative quantities in the composite import basket are likely to fall over the long run as gradual refining technology improvements are carried out by the aforementioned PSUs.

In the first quarter of 2012, India overtook another BRICS member, China as the largest importer of Iranian Crude, with direct imports of over 430,000 barrels per day. This is in spite of the difficulties of carrying out financial transactions with Iran due to the existing sanctions regime which specifically also targets financial institutions such as the Central Bank of Iran. In 2010, the Reserve Bank of India mandated that oil import payments to Iran would have to be settled outside the Asian Clearing Union (ACU) mechanism, which involves the central banks of India, Bangladesh, Maldives, Myanmar, Iran, Pakistan, Bhutan, Nepal and Sri Lanka. There is an old adage that "markets always find a way’ and this has largely been true in the case of imports from Iran. A recent development has been the institution of a settlement mechanism through which India can pay up to 45 percent of its import costs in local currency. India in its Union Budget for FY 2013 paved the way for the efficient working of this mechanism by including a tax exemption for such transactions which would otherwise be classified as "income earned abroad’ (by Iran) and therefore be liable up to a 40 percent tax.

A common argument by Iranian Government officials is that if the current sanction regime followed by the U.S and EU has led to the appreciation of oil price by 8 or 10 percent, it has only benefited Iran, which continues to supply oil to its major consumers China and India at more expensive rates. Indeed the cost-benefit works in Iran’s favour as Iran is more than able to offset losses due to higher transaction costs with the appreciation of the underlying price of the asset. The BRICS members consist of both net oil exporters and importers and represent 43 percent of the world’s population and therefore represent a more than credible global zeitgeist. They have suggested better international policy coordination to maintain macroeconomic growth momentum and curb commodity price volatility as immediate imperatives for the global economy. Since commodity prices are highly correlated with the oil economy, it is in all nations’ interests to ensure a viable and stable price for oil to ensure sustainable development in the current sluggish and uncertain global economic growth environment. BRICS provides a platform for India to voice concerns and direct strong criticism against Western countries that directly influence oil prices through the conduct of irresponsible foreign policy outside the international framework. In a way the BRICS platform allows India to express views that the constraints of realpolitik do not allow it to. It allows India’s 21st century foreign policy to evolve and emerge to better reflect domestic concerns.


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Vivan Sharan

Vivan Sharan

Vivan was a visiting fellow at ORF, where he supports programmes on the ‘new economy’. Previously, as the CEO of ORF’s Global Governance Initiative, he ...

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