In India, the lifting of economic sanctions on Iran has evoked mixed feelings. While officially, the country has welcomed it, the business fraternity is a worried lot. How justified are some of these concerns? More importantly, are India-Iran economic ties headed for better or worse times? The Dollar Business analyses. Satyapal Menon | September 2015 Issue | The Dollar Business

As the D-day approached, the world waited with bated breath for the outcome of negotiations to relax the most comprehensive and long-standing set of sanctions on any country since World War II. Sanctions that had crippled the economy of oil-rich Iran. Sanctions that were, in a convoluted way, a boon to India. The outcome had the potential to have widespread ramifications on global trade dynamics, world security and relations between Iran, the West and the rest. So, when the news hit the wires on July 14, 2015, that the accord – Joint Comprehensive Plan of Action (JCPOA) – had finally been signed by E3/EU+3 or P5+1, as they say in the United States, and Iran, one expected fireworks in global financial markets. While that didn’t happen, not even in the energy market, the feeling in India was mixed. The country’s official stance of course, was to welcome the deal. But the business and trade fraternity was not all that enthused. There were palpable apprehensions that the end of Iran’s isolation may affect India’s dominant position in trade with the Islamic republic. Do such concerns have a basis? Is the Iran nuclear deal a boon or bane for India? A detailed analysis by The Dollar Business follows...

During the meeting of Iranian Foreign Minister Mohammdd Javad Zarif and Indian Prime Minister Narendra Modi in New Delhi on the 14th of August, 2015, major issues concerning bilateral trade and investments were discussed.

If the supporters of JCPOA expected global financial markets to react euphorically to the end of Iran’s economic isolation, in return of it promising to not equip itself with nuclear weapon capabilities, they were in for a disappointment. Except for leaders on both sides shouting from their rooftops to score brownie points on the signing of the deal, it was just another day in office for most markets. Crude oil futures continued their journey lower, as they have been doing for over a year now, Gold barely blinked, most base metals shrugged it off and stocks continued yoyoing. Maybe it was a function of a deep sense of mutual distrust that is entrenched in the global psyche, one which has developed over years of experiencing posers. Probably, markets were figuring out whether the deal was a judicious denouement of an issue that has witnessed intransigent stalemates at innumerable rounds of confabulations and conferences. Perhaps for them, the development was just another kicking of the can down the road.

Blood enemies Markets aside, the main antagonists of the deal – Israel and Saudi Arabia – both of whom have had many-a-field day in the past, prophesying about the deal not coming to fruition, were unequivocal in their criticism of it and continue to do so. “The deal, in no way, stops Iran’s way to a bomb. Rather, it paves the way for the same. Even if Iran fulfils all the conditions of and complies with the agreement, it will, in 8-10 years, find itself with not just one or two nuclear bombs, but with a whole arsenal. On the other hand, if it decides not to go by the agreement, even then it will find itself with a nuclear arsenal, that too without the international community knowing about it," Ohad Horsandi, Spokesman, Embassy of Israel in India, tells The Dollar Business. Understandable it is that Israel believes that some mechanisms in the deal are not very effective and make it very difficult for the international community – the UN Security Council and P5+1 – to ensure that Iran complies with the deal. That this agreement will result in a stable Middle East is hard for adversaries of this deal. In fact, many feel that suspicion among the antagonists is a real threat to the newfound bonhomie and may continue to hamper the process of reconciliation and redemption. According to them, the claim of the antagonists that the deal is totally nuclear focused or nuclear weapon centric and does not include terrorism and Iran’s adventures in Syria, is a bit far removed from ground realities. But logically, doesn’t the deal legitimise Iran’s role in Syria? Doesn’t it give the country a licence to continue such nefarious infringements? Isn’t it like stating that you are free to continue your activities as long as you do not develop nuclear weapons?

Shashank Joshi, Senior Research Fellow, Royal United Services Institute, and an expert on South Asia and the Middle East, doesn’t think so. “One argument is that once the $100 billion or so – which was frozen following the sanctions – is released to Iran, it will be used to fund terrorist groups, the Assad regime and other Western or Israeli adversaries. I think this is a little exaggerated, because all that money is not being made available to Iran in the short term. I think people should understand that the deal includes stringent provisions for snapback sanctions. I have never before seen any diplomatic agreement like this. It effectively nullifies veto in the UN Security Council,” he tells The Dollar Business. What makes the deal interesting is that even Russia and China cannot block the reimposition of sanctions if Iran makes a wrong move. This is an incredible provision and a very modern diplomatic instrument. Iran cannot use this period to buy time, because the inspection regime is understandably thorough. In fact, it is understood that hereon, there will be more eyes on Iran's nuclear development activities than there were in the past. That obviously means Iran will try that much less to experiment with trickery. "Iran cannot take ten years for economic growth and secretly develop nuclear weapons, because inspections are going to increase, not decrease,” Joshi adds. Many like him feel that one shouldn’t always second-guess a country’s international commitments. True that the world cannot be totally sure of what's on Iran's mind as far as abiding to the rules laid down in the deal is concerned. It may even get uncomfortable in the near future and decide that life was easier with the sanctions. Perhaps. But, at the same time, what makes the deal significant for the western powers is that it will give the political class in Iran some time for thought. In case the country violates rules thereafter, it will get easier for the international community to impose more stringent measures against it, as compared to those imposed in 2009. Supporters of the deal are of the view that a nuclear Iran is a far bigger threat than it getting involved in the internal politics of the Middle East and since the former aspect has been taken care of in the deal, it should be welcomed.

] Thousands of people protested at Times Square in New York against the lifting of sanctions on Iran, a week after the nuclear accord was signed. Even today, in the United States, public opinion is fluctuating in favour and against the deal.

Obama’s legacy A major debate about the fate of the deal is whether or not it will pass the US Congress, which needs to give it its seal of approval in September. For, Big Brother United States, which was instrumental in brokering the deal, is witnessing fluctuating and divergent trends in public opinion about it. With the 2016 presidential race already heating up, Republicans, led by Presidential frontrunner Donald Trump, are venting their spleen about what they term a ‘sellout to Iran’. It’s also no secret that the powerful Jewish lobby in United States – read Israel – have had a more than a decisive role in making and unmaking Presidents. Then there’re also the pulls and pressures of defence lobbies, which benefit from an unstable Middle East, and petroleum lobbies, whose fortunes depend on oil market dynamics.

One saving grace for the deal is that it can even survive a Congressional rejection, particularly since President Obama has vowed, if necessary, to use his veto to push the deal through. Moreover, even if a Republican candidate wins the bid to the White House in 2016 and American public opinion drives the country to rethink, United States might get isolated if it backs out of the deal, since other signatories to it – Germany, France, China and Russia – haven’t indicated any propensity to do the same. [Whether Obama's veto prevails or gets overridden is to be seen yet.] “We need to differentiate between American and European public opinion. In Europe, we are okay with the deal and there are no serious debates against it. In fact, the French foreign minister went to Tehran one week after the deal was signed. Even the United Kingdom is shortly going to reopen its embassy in Tehran. All this indicates that there is no serious opposition and no serious debate against the accord,” Joshi confirms.

A friend in need…

One of the main reasons behind Iran softening its stance and agreeing to greater scrutiny of its nuclear facilities by the International Atomic Energy Agency (IAEA) is the fact that years of economic isolation had crippled its economy. Not only had its annual inflation shot up to a nightmarish 40%-plus just a couple of years back, but its currency had lost two-thirds of its value since 2012, which included an unprecedented devaluation by the Iranian central bank in July 2013. Sanctions had also seen the Islamic Republic’s exports collapsing from $117.1 billion in CY2011 to just $64.2 billion in CY2014. In fact, President Hassan Rouhani’s election campaign in 2013 was based solely on a plank to revive the country’s economy. Interestingly, when the West, largely, had cut-off its ties with Iran, particularly since mid-2012, when US and EU banned all global banks from completing oil transactions with Iran, one of the only ‘friends’ the Islamic republic had in the world was India. This, not only because of India’s non-alignment history, but also because it was one of the only seven countries that US had allowed to continue trading with Iran, the others being South Korea, Malaysia, South Africa, Sri Lanka, Taiwan and Turkey.

…is a friend indeed

Thanks to India being one of the very few countries that traded with Iran when it was ostracised by the rest of the world, the country today sits pretty as the latter’s second-biggest trading partner. Does it mean India can consolidate its trading ties with Iran on the basis of this camaraderie? Many believe that Iran will not be sentimental about its relations with India. Reason being, India was not as much a source of support to Iran as China or Russia were, both of which were inside P5+1 and so, had leverage over the deal. Not to forget, India has even voted against Iran at IAEA on a number of occasions. It has also slowed its investments in Chabahar Port and other places. As a result of this deal, there will be many other nations trying to win its attention, thereby making India jealous on some fronts. Dr. A. Didar Singh, Secretary General, Federation of Indian Chanbers of Commerce & Industry (FICCI), too agrees that there will now be increased competition for Indian companies in Iran, but he has bit of advice on how to deal with it. “For dealing with competition, India will not only have to use its corporate sector’s muscle, but also its goodwill with the country. We feel India should use the opportunity to expand in areas that saw growth during the sanction period, even before sanctions are completely lifted,” he tells The Dollar Business.

] Despite having the world's 4th largest proven oil reserves, Iran doesn't have enough refining capacity and often imports refined petroleum oils. In fact, in CY2009, refined petroleum oils were India's 2nd biggest exports to the Islamic nation.

A missed opportunity

For a detailed analysis of India-Iran trade ties, The Dollar Business Intelligence Unit identified two years – CY2009 and CY2014 – to define the time window. While CY2009 was the last year before US passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), CY2014 was the last full year before the nuclear deal was signed in July this year. The analysis (see table on page 44) reveals that India’s growth in exports to Iran is just a function of the latter’s desperation and not the former’s better penetration of its market! For, by CY2014, although India has gained market share in five of its top-10 exports to Iran in CY20009, it has lost the same in the remaining five. On the other hand, all 10 of India’s top-10 exports to Iran in CY2014 are a result of gains in market share, with three of them having a share of over 90%. Why? The reason is simple. Iran couldn’t find many countries other than India that were willing to export to it. Simply stated, in the course of the five years between CY2009 and CY2014, India was not exactly able to play on its strengths, and all that it could achieve in exports to Iran during the said years was a direct result of Iran's weaknesses. Elementary, my dear Watson! Let’s take the example of steel pipes of more than 406.4 diametre (HS Code 730511) – India’s third-biggest export to Iran in CY2009. Though India is the world’s 3rd biggest exporter of it, while its exports of the same to Iran represented 39% of the country’s exports of it in CY2009, in CY2014, the same was just 7.3%. And that’s the case with four of India’s other top-10 exports to Iran in CY2009 – light petroleum oils and preparations (HS Code 271011), organic compounds not specified elsewhere (HS Code 294200), cold-rolled iron or steel coils of more than 600 mm (HS Code 720916) & new pneumatic rubber tyres for lorries and buses (HS Code 401120).

India's biggest export to Iran continues to be basmati rice, with over $1.1 billion worth of exports in FY2015.  

While India managed to gain market share in the other five of the top-10, that each of its top-10 exports to Iran in CY2014 was a function of gains in market share more than negates the conclusions that can be drawn from the former. Another crucial data point, which highlights that India-Iran trade ties are more a function of Iran’s desperation during the sanction years and India’s convenience and hence are easily reversible, is that the total value of trade between the two nations hit an all-time high in FY2012 – the year both US and EU tightened their nooses around Iran with all their might. That even this all-time high was mostly a function of Iranian crude oil exports to India surging, seals the argument, doesn’t it?

Validating this inference, Joshi says, “The private sector in India didn’t exploit Iran’s isolation enough and failed to make inroads into its economy, when it could have done so. And I think since it failed to do so, it will now, inevitably, face more competition.” Though India had not properly capitalised on the opportunity to widen its basket of exports to Iran, those taking a more conservative view are of the opinion that with US watching and monitoring every move, constraints and roadblocks were many. They attribute the low value of exports to a pervasive environment of unpredictability and banking restrictions. “Although oil and gas was exempt from sanctions, but informally, the Indian government was being forced to go by the United States’ diktats,” T. N. R. Rao, Chairman, Advisory Board, South Asia Gas Enterprise (SAGE), which is working on an ambitious project to lay undersea gas pipelines between Oman, Iran and India, tells The Dollar Business.

Many who oppose the deal fear that money flowing into Iran will be used to fund the Assad regime in Syria, terrorist regimes like Hamas and Houthis and create further instability in the region.  

Newer pastures

Although India might not have made serious inroads into the Iranian market when it was out of bounds for most, the country does have a serious presence in the latter. “Trade in many sectors could not be developed in the past due to the lack of a proper banking channel to undertake transactions. Given India’s export capabilities in many of these sectors and the massive demand for them in Iran, the potential of India-Iran trade is immense,” Dr. Singh says. For example, despite being a major exporter of generic medicines to even the developed world, India’s pharmaceutical products exports to Iran were worth just $57 million in FY2015. Many claim that this is going to change because during sanction years, only the rich and powerful in Iran had proper access to medicines, which probably answers why Germany, France and Switzerland account for over 50% of its pharmaceutical products imports in CY2014. Now that normalcy is expected to return resulting in Iranian masses getting access to pharmaceutical products, India will be in a position to benefit.

On the other hand, while other countries making a beeline for Iran will increase competition for India’s exports, it will create a tremendous opportunity, given the expected role of Chabahar Port in Iran’s trade and India’s investment in it. And if one had any doubt about the port project reaching culmination, given the recent commitments by both India's Prime Minister Narendra Modi and Iran's President Hassan Rouhani, they should be put to rest. In fact, Chabahar Port is not the only infrastructure project India has committed to in the region. There’s the International North-South Transport Corridor (INSTC), which will further amplify Chabahar Port’s strategic significance through a network of connectivity linkages, and the undersea Middle East to India Deepwater Pipeline (MEIDP). Dr. Meena Singh Roy, Head, West Asia, Institute of Defence and Strategic Analyses (IDSA), thinks the strategic significance of Chabahar Port for India is immense, with INSTC providing India easier, faster and cheaper access to Central Asia and Russia. She is of the opinion that once materialised, these projects will reduce the cost and time involved in transporting crude oil from the Gulf and Central Asia to India by about a third. “From India’s point of view, the strategic importance of Chabahar Port is immense. It not only gives the country access to oil & gas resources in Iran, but also opens up its access to Central Asian Republics (CAR). India and Iran have already taken initiatives to enhance connectivity through bilateral agreements. The trilateral agreement between the governments of India, Iran and Afghanistan, to develop the Chabahar route, through Melak, Zaranj and Delaram will facilitate regional trade and transit, thus contributing to regional economic prosperity. India is also interested in investing in the Chabahar-Faraj-Bam railway project. If that becomes a reality, goods from Bam on the Afghan border can be taken through the Zarang-Delaram road, which is linked with the Garland Highway, connecting all major Afghan locations,” she tells The Dollar Business.

On similar lines, elucidating the benefits of MEIDP, Rao says, “MEIDP will originate from Chabahar on the southern coast of Iran and Ras Al-Jafan on the Oman coast. After traversing deep in the Arabian Sea, it will bring in gas to Porbandar in South Gujarat. It will have the capacity to channel 1.1 billion standard cubic feet of gas a day (1,100 MMSCFD) to India, thus increasing the supply of natural gas in the country by almost 2x. Thus, it will facilitate India’s access to continuous and uninterrupted flow of feedstock for power generation and fertiliser production. Another major advantage of MEIDP is that it will reduce logistics costs drastically. Normally, gas is first converted into liquid form for the ease of transportation and then, re-converted to gas at the destination. But since supply of gas through the pipeline will be in gaseous form itself, conversion expenses will also be saved. All this will add up in terms of lower prices and higher availability.” Moreover, Iran has already indicated its intentions to open up the proposed petrochemical complexes around the Chabahar Port for investments. Will India be interested in having stakes in any such project? “Certainly yes! Government of India is already contemplating setting up reverse Special Economic Zones (SEZs) for petrochemicals in Iran, wherein products could be manufactured in Iran and transported back to India,” answers Dr. Mahinder Singh, Secretary General, Chemical and Petrochemical Manufacturers Association of India (CPMAI).

Deepwater pipeline transportation is considered to be the best and the cheapest mode for supply of gas, apart from being very environment friendly. And MEIDP could be a massive boon for energy-hungry India.

The larger picture

The lifting of sanctions on Iran shouldn’t just be considered on the basis of what its impact on India’s exports will be. For, its impact on India’s imports and the larger economy is going to be massively positive. And the sectors that will benefit the most from it are, without a doubt, oil & gas, petrochemicals and fertilisers. Firstly, Iran will try to make up for lost time and get its oil production going in right earnest, which in turn will, very likely, depress oil prices further. That in each of the first four weeks since the deal was signed, oil prices have ended lower, validates that markets are already fearing a glut. And we don’t have to talk about the benefits of lower oil prices for the Indian economy, do we? Secondly, given that the deal has removed all roadblocks on SAGE’s proposed gas pipeline, India might soon have access to Iran’s cheap natural gas, which, in turn, might turn out to be a lifeline for India’s fertiliser industry. Given that India is the world’s 3rd biggest importer of fertiliser, with $6.4 billion worth of imports in FY2015, the effect of cheaper natural gas on the country’s larger economy is going to be humongous.

The International North-South Transport Corridor (INSTC) is expected to be India's gateway to Central Asia and Europe and reduce transportation time and cost by a third.   

Bonhomie!

The future of India-Iran trade ties can also be gauged from the fact that India's now former Commerce Secretary Rajeev Kher had toured the latter three months before the nuclear deal became a reality. Following his meeting with Iranian officials during the Joint Working Group (JWG) of the two countries, Kher had said that Iran was looking at enhancing its trade relations with India, boosting its manufacturing sector via Indian investment in petrochemicals, engineering, pharmaceuticals and agro-processing and had proposed negotiating a Free Trade Agreement (FTA)! An FTA with a country under sanctions? Sums up the bonhomie, doesn't it?

A file photo of Bandar-e Anzali port on the Caspian Sea in North Iran. As Iran looks to rebuild its port infrastructure post the lifting of sanctions, India is expected to play a major part in it.

The riders

The passage is clear, but the pathway is not without roadblocks. Both India and Iran need each other’s support to go way forward. From Iran’s point of view, India, being a big market for its oil resources, added to its expertise in infrastructure development, is a country that it has to invest in, in terms of rapport and relationship. From India’s perspective, Iran, with its oil and infrastructure requirements, is a country that could fuel the engines of its own economic growth. But the relationship would not be without its uncertainties and will also depend on India’s equations with Israel and the United States.

India's investment in Chabahar Port in South Iran is expected to not only boost the latter's international trade, but also help the former increase its trade with the whole of Central and West Asia. 

Joint Comprehensive Plan of Action's (JCPOA) Ten Commandments

-- Iran envisions that this JCPOA will allow it to move forward with an exclusively peaceful, indigenous nuclear programme, in line with scientific and economic considerations, in accordance with the JCPOA, and with a view to building confidence and encouraging international cooperation. In this context, the initial mutually determined limitations described in this JCPOA will be followed by a gradual evolution, at a reasonable pace, of Iran’s peaceful nuclear programme, including its enrichment activities, to a commercial programme for exclusively peaceful purposes, consistent with international non-proliferation norms.

-- The E3/EU+3 envision that the implementation of this JCPOA will progressively allow them to gain confidence in the exclusively peaceful nature of Iran’s programme. The JCPOA reflects mutually determined parameters, consistent with practical needs, with agreed limits on the scope of Iran’s nuclear programme, including enrichment activities and R&D. The JCPOA addresses the E3/EU+3’s concerns, including thorough comprehensive measures providing for transparency and verification.

-- Iran will not engage in activities, including at the R&D level that could contribute to the development of a nuclear explosive device, including uranium or plutonium metallurgy activities, as specified in Annex I.

-- Iran’s long term plan includes certain agreed limitations on all uranium enrichment and uranium enrichment-related activities including certain limitations on specific research and development (R&D) activities for the first 8 years, to be followed by gradual evolution, at a reasonable pace, to the next stage of its enrichment activities for exclusively peaceful purposes, as described in Annex I. Iran will abide by its voluntary commitments, as expressed in its own long-term enrichment and enrichment R&D plan to be submitted as part of the initial declaration for the Additional Protocol to Iran’s Safeguards.

-- Iran will allow the IAEA to monitor the implementation of the voluntary measures for their respective durations, as well as to implement transparency measures, as set out in this JCPOA and its Annexes. These measures include: a long-term IAEA presence in Iran; IAEA monitoring of uranium ore concentrate produced by Iran from all uranium ore concentrate plants for 25 years; containment and surveillance of centrifuge rotors and bellows for 20 years; use of IAEA-approved and certified modern technologies including on-line enrichment measurement and electronic seals; and a reliable mechanism to ensure speedy resolution of IAEA access concerns for 15 years, as defined in Annex I.

-- The EU will terminate all provisions of the EU Regulation, as subsequently amended, implementing all nuclear-related economic and financial sanctions, including related designations, simultaneously with the IAEA-verified implementation of agreed nuclear-related measures by Iran as specified in Annex V, which cover all sanctions and restrictive measures.

-- The United States will cease the application, and will continue to do so, in accordance with this JCPOA of the sanctions specified in Annex II to take effect simultaneously with the IAEA-verified implementation of the agreed nuclear-related measures by Iran

-- Eight years after Adoption Day or when the IAEA has reached the Broader Conclusion that all nuclear material in Iran remains in peaceful activities, whichever is earlier, the United States will seek such legislative action as may be appropriate to terminate, or modify to effectuate the termination of, the sanctions specified in Annex II on the acquisition of nuclear-related commodities and services for nuclear activities contemplated in this JCPOA, to be consistent with the U.S. approach to other non-nuclear-weapon states under the NPT.

-- The E3/EU+3 and the United States specify in Annex II a full and complete list of all nuclear-related sanctions or restrictive measures and will lift them in accordance with Annex V. Annex II also specifies the effects of the lifting of sanctions beginning on “Implementation Day”. If at any time following the Implementation Day, Iran believes that any other nuclear-related sanction or restrictive measure of the E3/EU+3 is preventing the full implementation of the sanctions lifting as specified in this JCPOA, the JCPOA participant in question will consult with Iran with a view to resolving the issue and, if they concur that lifting of this sanction or restrictive measure is appropriate, the JCPOA participant in question will take appropriate action. If they are not able to resolve the issue, Iran or any member of the E3/EU+3 may refer the issue to the Joint Commission.

-- If a law at the state or local level in the United States is preventing the implementation of the sanctions lifting as specified in this JCPOA, the United States will take appropriate steps, taking into account all available authorities, with a view to achieving such implementation. The United States will actively encourage officials at the state or local level to take into account the changes in the U.S. policy reflected in the lifting of sanctions under this JCPOA and to refrain from actions inconsistent with this change in policy.  

Shashank Joshi, Senior Research Fellow, RUSI, UK

Ohad Horsandi, Spokesman, Embassy of Israel in India

Dr. Meena Singh Roy, Head, West Asia Centre, Institute for Defence Studies & Analyses (IDSA)

Dr. A. Didar Singh, Secretary General, FICCI

T. N. R. Rao, Chairman, Advisory board, South Asia Gas Enterprise

Raymond E. Vickery, Jr., Senior Director, Albright Stonebridge Group LLC