March 18, 2013 | Quote

Why India Is Finally Complying With Sanctions on Iran

Earlier this week, North Korea canceled its 1953 armistice with the South, offering a vivid and no-doubt intentional reminder of how nuclear weapons can turn localized conflicts into the subject of intense global anxiety. Luckily, events from late last week made a Middle Eastern repeat of the Korean peninsula's ongoing nuclear nightmare slightly less likely. And considering the stakes involved — stability in the Middle East and the survival of the global nuclear nonproliferation regime, for starters — even a slight decrease in its likelihood is welcome news.

A week ago, Reuters reported that one of India's biggest state-owned oil refineries, and the country's largest single purchaser of Iranian oil, is dramatically cutting back on its imports thanks to the now total lack of companies now willing to insure Iranian oil shipments. The refinery purchased five million metric tons of Iranian oil last year, meaning that a third of India's projected oil trade with Iran is now in jeopardy. U.S. and EU sanctions have narrowed the space for commerce with the Islamic Republic to the point where even one of the most reluctant participants in the sanctions regime has no choice but to continue scaling down its oil purchases. “As sanctions tighten, the room to maneuver for Iran and its trading partners continues to shrink,” explains Trevor Houser, an expert on energy-related issued for the Rhodium Group, in discussing the latest Indian reductions. “The number of workarounds and loopholes that you can exploit gets smaller and smaller, and you have a growing number of unintended consequences like this.”

Indeed, these reductions have nothing to do with any sanctions that specifically deal with India. Quite the opposite; in fact, India was one of a handful of countries that received a waiver under U.S. sanctions law. It simply has to show a “significant reduction” in Iranian oil imports in order to be in compliance with the sanctions regime, a subjective standard with no set numeric value. India's government and polity tend to resent U.S. sanctions, in any event. “They see it restraining their freedom of action, and they feel they don't have much say in how the sanctions are imposed,” says Tanvi Madan, director of the Brookings Institution's India Project. “It's not a question of joining the sanctions regime. It's that they don't have a choice.” The sanctions have created conditions under which even the most resistant countries have no option but to fall in line.

In India's case, this has produced a remarkable turnabout. Just a year ago, India was actually increasing its purchases of Iranian oil; last year, the two countries swapped trade delegations just months after an Iranian terrorist attack on an Israeli diplomat in Delhi. Iranian oil helped quench India's burgeoning energy needs, while the countries' partnership provided India with an easy route into Afghanistan, a critical front in its long-running cold war with neighboring Pakistan. Even so, Indian purchases of Iranian oil have declined 22 percent since March of 2012 — and that was before last week's news.

India might even have self-interested reasons for complying with the sanctions. Madan emphasizes that India has no desire to see Iran go nuclear. She says that India, which has perhaps the third-largest population of Shi'ite Muslims on earth, fears potential spillover from sectarian tension in the Middle East, as well as the domino-effect like spread of nuclear weapons in the region. On a more quotidian level, the sanctions eliminate other potential buyers of Iranian oil, allowing India to bargain for better deals. “The Indian government is trying to use this as leverage with the Iranians,” says Madan. “Next year they can say, we're going to reduce imports by 10 percent unless Iran reduces oil prices.”

U.S. sanctions that went into effect on February 6 also make it nearly impossible for Iran to repatriate foreign currency. India currently buys Iranian oil by paying into an in-country escrow account managed by the Iranian government. India's oil purchases now act as a kind of domestic stimulus: India used to pay for oil in dollars that would end up in Iran. Now it pays in rupees that can only be spent in India, on Indian products.

Madan says that the Indian government isn't fond of this arrangement, due to an understandable wariness of letting any foreign government hold large, rupee-denominated bank accounts in India. Even so, Houser pointed out that the February 6 sanctions could actually benefit India: “It forces large quantities of what used to be dollar denominated trade into local currency barter arrangements,” a situation he likened to “being told you can only do your shopping at Walmart.” India has more to gain from going along with the sanctions regime than it does from bucking a nearly worldwide consensus on the importance of stanching the spread of nuclear weapons. Even for the most reluctant adherents to the sanctions regime, cooperation is simply a better option than recalcitrance.

This is something that every major importer of Iranian oil has already realized. The sanctions-related plunge in the country's oil trade has been little short of astonishing: at one point during the summer of 2012, imports from Japan and South Korea, once vital Iranian trading partners, dropped to around zero barrels a day. In one sense, the sanctions are working — they've soaked the Iranian government's foreign reserves while winning even the Indias of the world over to the anti-proliferation side. “Where Iranian exports are today is significantly lower than where even the most ardent supporters of sanctions expected them to be,” says Houser.

But from another perspective, the sanctions have only one conceivable measure of success, and that's the eventual dismantling of most of Iran's nuclear program. Iran currently has 4-6 potential atomic bomb's worth of 3.5 percent enriched uranium — the ability to enrich it to weapons grade quickly enough to evade the detection of International Atomic Energy Agency inspectors or a foreign intelligence agency is their only remaining technical hurdle.

This is a significant obstacle, but it's trifling compared to the barriers that had to cleared in order to make it that far in the first place. Uranium enriched to 3.5 percent has gone through 70 percent of the centrifuge revolutions needed to reach weapons grade. IAEA inspectors visit the Fordow and Natanz nuclear facilities once a week, but the time will come when the Iranians have enough centrifuges running to achieve undetectable breakout. Even then, the number of centrifuges matters less if Iran has enrichment facilities that the IAEA doesn't know about — or if it has 20 percent enriched uranium on hand, which is 90 percent of the way to weapons grade. They currently have 167 kilograms of the stuff.

The sanctions could forestall this moment by bleeding the Iranian government of its foreign reserves to the point that they have no choice but to re-assess their nuclear ambitions. Or, they could decide that the nuclear program is simply more trouble than it's worth, and negotiate a dignified way out.

Last month's negotiations between Iran and the five permanent members of the U.N. Security Council and Germany (the “P5+1”) in Almaty, Kazakhstan suggested that the sanctions haven't been enough to decisively change the Islamic Republic's calculus. Iran offered little more than a temporary suspension of 20 percent enrichment, as well as some increased IAEA monitoring, in exchange for significant sanctions relief (Iranian state media viewed the negotiations as a success). The P5+1 proposal of lifting sanctions on Iranian gold purchases are especially troubling, according to Mark Dubowitz, the executive director of the Foundation for Defense of Democracies and an expert on Iran sanctions. “The gold concessions could blow a hole in the entire sanctions regime,” the point of which is to “is to deny [Iran] of hard currency.”

The U.S. Congress has carefully calibrated its response. A bill currently before the House of Representatives attempts to prevent companies from converting foreign currency to Euros on behalf of Iranian businesses. But it only does this through a non-binding “sense of the Congress,” and despite reports to the contrary, the sanctions currently under consideration on Capitol Hill are deliberately non-coercive. “It's to pressure the Europeans into coming up with made-in E.U. solutions,” says Dubowitz. Similarly, the House bill nominates a number of Iranian companies for the Treasury Department's Specially Designated Nationals list, but Dubowitz points out that the executive branch has a great deal of flexibility in terms of implementation. “The administration can calibrate the enforcement of that provision with whatever's happening on the diplomatic front,” he says.

The House bill hints at later action while actually changing very little — at least for the time being. “Congress provides the hammer, and the administration turns the hammer into a scalpel,” Dubowitz says of the process of fashioning sanctions against Iran. “It's a well coordinated, well-executed strategy between Congress, the administration and our allies.” India, which is finding it harder to trade with Iran despite being given waivers under U.S. law, is arguably a case in point.

Read the full article here.


India Indo-Pacific Iran Iran Sanctions