India-Iran trade in the shadow of US sanctions

By Gautam Khurana, India Law Offices
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India and Iran have been trading partners for thousands of years. Iran’s major exports to India are oil, fertilizers and chemicals, and it imports cereals, tea, coffee, spices and organic chemicals from India, which leaves a heavy negative balance of payment of more than US$8 billion against India. Iranian oil is attractive to refiners in India as Iranian companies provide 60 days of credit for purchases, a term not available from other suppliers of crude such as Saudi Arabia, Kuwait, Iraq, Nigeria, and the US.

India
Gautam Khurana
Managing partner
India Law Offices

With the US reneging on a nuclear deal made with Iran and reimposing sanctions in November 2018, India is under pressure to halt trading with Iran. This leaves India with the tough task of choosing between the US and Iran. Losing out on the US as a trading partner is unthinkable and leaving Iran has the double implication of losing a traditional partner as well as a rich resource of oil and fertilizers, both areas where India is deficient.

To facilitate a smooth transition, six-month waivers from economic penalties were granted by the US to Iran’s biggest oil customers, China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece, allowing them to continue limited imports, and giving them time to find alternative sources and avoiding a shock to global oil markets. The US is, however, putting pressure on governments to reduce purchases of Iranian oil to zero, denying the Iranian government its main source of revenue. The first round of waivers expired 4 May, now exposing the countries to the imminent threat of sanctions.

Meanwhile, Iran has done well for itself even as the sword of sanctions was hanging over its head. Besides petroleum and agricultural products, Iran has invested heavily in science and technology in the last two decades bringing it into in a leading position in nanotechnology, medical devices and other related high-technology areas. Iran has managed to work on high technology at economical rates under the guidance of the Iran Nanotechnology Innovation Council in the field of pharmaceuticals, medical devices, textiles, packaging, air and water purification. Iran has been able to sell its indigenous technology to countries such as China, Malaysia, Indonesia and Iraq. Iran is now ranked fourth worldwide in its nanotechnology research. India would do well to get access to Iranian technology and to find a method of continuing trade with Iran.

The biggest barrier to trade with Iran has been the breakdown of the country’s banking system. India’s UCO Bank and IDBI Bank have been the only banks that make trading possible with Iran in rupees. Barter trade seems the only viable option under the current sanctions. With barter as the only option, Indian exports could be a major beneficiary if preferential trade agreements are put into place.

Chabahar port is one of the biggest reliefs in the India-Iran trade relationship as it has been exempted from US sanctions and can facilitate a lot of third-country exports and imports for India. The Chabahar port at Iran’s southern coast is easily accessible from India’s western coast and is increasingly seen as a counter to Pakistan’s Gwadar port located 80 km from Chabahar. This creates an alternative route to Afghanistan making it not only an economic but also a security project.

Solutions and possibilities: Under the current circumstances the best solution to continue trade is to reduce trade barriers and customs and to encourage both sides to use barter as the trade mechanism and boost trade between the countries. A lot of trade is still conducted using intermediaries that are not party to the US sanctions. The use of intermediaries raises prices by nearly 38% making trade unviable in many products.

Iranian business houses need to understand the tactical and strategic fit that India offers and set up business and trading posts directly in India. Transferring and licensing their technology to their own businesses and joint ventures with Indian companies would provide market access to Iranian businesses and build up a platform for international trade in India. Similarly, Iran has many high technology parks like Pardis Technology Park, where Indian businesses can set up operations to get access to the technology and the CIS (Commonwealth of Independent States) markets through the Chabahar port.

Legal dimension: While Iran will continue to reach out to the international community on the illegality of the sanctions and hope that the Europeans would be able to stave off pressures from the US, India can adopt various options to continue its relations with Iran.

Gautam Khurana is the managing partner of India Law Offices.

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