[Editorial Analysis] A tough balancing act between geopolitical realities and energy security

Mains Paper 2: International Relations

Prelims level: OPEC, INSTC

Mains level: Impact of US sanctions on Iran on the global economic and geopolitical order

Context

• The US oil and banking sanctions against Iran will come into effect on 4 November

• As the deadline nears, the oil market is unusually calm

• The Organization of the Petroleum
Exporting Countries (OPEC) crude price basket went down by 8.6 %, while the Brent benchmark fell by 9.4 % during the month

Effect on the economy of India as well as other countries

• For most of the consuming countries, it is not simply a question of finding replacement oil

• Crude import has to be at prices they can afford.

• The price has already gone up.

• The increase in oil prices is not only due to the impact of sanctions against Iran but is also driven by policies pursued by Opec and non-Opec producers to restrict crude oil production to keep the prices high.

• The Indian crude oil basket is up by nearly 30% since last year, which would add more than ₹2 trillion to our annual oil import bill if the trend persists.

• If rupee depreciation is factored in, the effect will be even more pronounced.

Connectivity problem

• There are also issues of connectivity and trade with Afghanistan and Central Asia.

• Seen against the background of worsening situation in the Af-Pak region, this factor assumes added importance.

• India is committed to develop Chabahar Port which is in no way linked to Iran’s oil exports, which go through the Kharg terminal in the Gulf.

• Apart from Chabahar, India also has interest in the International North-South Transit Corridor (INSTC), which runs through Iran.

• This will improve connectivity with five Central Asian republics.

Sanctions are not universal

• This round of sanctions is different, as it is not supported by the European Union and the United Nations.

• Germany, France, the UK along with China and Russia continue to support the nuclear deal.

• Iran’s compliance with the nuclear accord has been confirmed by the International Atomic Energy Agency (IAEA).

• The International Court of Justice (ICJ) has also ruled against the US sanctions.

Options for India

• During the last round of sanctions against Iran, a rupee payment arrangement was evolved.

• This involved making 45% of oil payments in rupees, which were utilized to cover Indian exports to Iran.

• During the last round of sanctions, India reduced its crude import from Iran from 21 million to 10 million tonnes per annum.

• For India, the only option that remains is reviving rupee payment arrangement to bring down current account deficit, and ensure continuity in Indian exports, which are largely limited to food and pharmaceuticals.

Way forward

• India has an extremely important and growing relationship with the US.

• It also has geopolitical compulsions, and an age-old relationship with Iran as well as its Arab neighbours.

• India needs to maintain a fine balance between the two

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