TEHRAN -- Re-imposition of sanctions by U.S. President Donald Trump’s administration against Iran sent the national currency rial on a roller coaster ride against the U.S. dollar, spiraling inflation and soaring cost of living for the general public in Iran. From the record highs of 190,000 rials against the dollar in late September, the greenback exchange rate has now recovered, hovering around 10,000 rials in the open market. 

In May Washington announced U.S. exit from the Iran nuclear deal (also called JCPOA), and imposed tougher sanctions with a goal of reducing Islamic Republic’s oil exports, which peaked to 2.8m bpd in April, to “zero”. The news of the disruption of oil supply from Iran sent global crude prices soaring, touching $86 per barrel in October.
Such uncertainties from the supply market have disrupted vulnerable energy dependent countries’ economies and in some cases have created riots in the streets.

The announcement of the sanctions had a domino effect for India, Iran’s second largest crude buyer, importing 540,000 bpd on average this year. Iran was India’s third largest crude supplier after Saudi Arabia and Iraq.

With one of the highest economic growth rates in the world, India imports 80 percent of its crude and the demand is on the rise. As a result of the uncertainties in crude supply created by the sanctions, the Indian rupee fell to a record low of 73.81 against the dollar on October 5, cooling off the domestic stock market and escalating inflation.

Indian oil refiners had a good deal buying Iranian crude at $3-5 a barrel cheaper compared to other Middle Eastern producers and benefits included $2-4 discount for a barrel of crude, $1 a barrel on freight subsidies and extended payment facilities, the Mumbai-based Business Today reported.

Higher crude prices imply higher deficits for India, which in turn leads to fall of Indian rupees against the dollar. A $10 per barrel change in crude results in 50 basis points current account deficit and 30 basis point impact on inflation, reported Kotak Institutional Equities in its August report.
Therefore, it is to the interest of both countries not to disrupt the bilateral trade. Global oil trade is conducted in U.S. dollars. To bypass the 2012 sanctions imposed by former U.S. President Barrack Obama Administration, the two countries continued business in rupees and barter. It is imperative that a similar arrangement be organized again in order to continue bilateral trade.

North-South Corridor

The 7,200km International North-South Transport Corridor (INSTC), starting from Mumbai and extending to Astrakhan, Moscow, Baku and further north will require India-Iran bilateral cooperation. Chabahar Port development, which has also received a waiver from Washington, is the sole Iranian deep sea port and the only one directly facing the Indian Ocean.
 
During an interview with the Tehran Times in January 2017, I had the pleasure of meeting Indian Ambassador to Iran Saurabh Kumar, who will be ending his term in Iran in the near future. He emphasized that “Chabahar is a very important symbol of cooperation between India and Iran. It is a very important issue of connectivity between India, Iran and Afghanistan as well as the Central Asia region,” adding the Indian private sector will be the major investor.

The first phase of the strategic Iranian port was inaugurated by President Hassan Rouhani last year. The opening of the first phase of Shahid Beheshti Port, as part of Chabahar Port, has tripled its capacity to 8.5 million tons. The agreement for leasing the operational control of this port was signed during Rouhani’s visit to New Delhi in February 2018.

The operational control of Shahid Beheshti port was formally leased to Indian Ports Global Ltd. (IPGL) for a temporary period of 18 months, IRNA quoted Behrouz Aqaei, director general of Sistan-Baluchestan Ports and Maritime Organization, as saying.  IPGL’s major tasks include loading and unloading operations, procurement, and marketing.

Emphasizing advantages of the International North-South Transport Corridor, Russian economy expert Leonid Khazanov told Trend news agency that the route from Baltic countries to India will reduce time and cost of delivery of goods by 35-40 percent. He added that for practical implementation of the project it is not only necessary to develop the ports of the Caspian Sea, but also accelerate customs clearance.

Pharmacy industry

Global Summit on Maternal and Child Health care was held in India in December with the presence of a large number of health ministers and Indian pharmaceutical companies. Iranian Minister of Health and Medical Education Hassan Qazizadeh Hashemi attended the three-day summit and pointed out that Tehran must change its traditional approach of leaning towards European and U.S. companies for buying medicinal drugs.

Referring to India’s pharmaceutical capabilities, he said: “A major part of the European and U.S. markets is dominated by Indian pharmaceutical companies.” He added that New Delhi is one of the major powers in the field of medicine, raw materials and vaccines.

Qazizadeh Hashemi said constructive talks were exchanged with Indian health minister and CEOs of pharmacy companies in relevant field.

As per the six-month waiver granted by Washington, Indian can buy 300,000 bpd of crude from Iran for the next six months. Iranian oil export funds will now be locked up in escrow accounts that can only be approved for humanitarian purposes including basic commodities and medicine.

Payment mechanism

In order to make a long-term arrangement both countries need to embark on a mechanism similar to the previous one in 2012, i.e. a rupee/barter trade arrangement.

Quoting sources, Bloomberg reported last month that an alternative mechanism in India will use escrow accounts of five Iranian banks held with the state owned United Commercial Bank (UCO Ltd.) to deposit money for oil purchases to overcome U.S. sanctions. The payment mechanism will allow India to continue oil purchases despite sanctions as it fulfills Trump’s goal to choke money going directly to Iran.
UCO Ltd. Bank Managing Director Atul Kumar Goel on December 18 said: “We already have 15 Iranian bank accounts, out of these five have come under secondary sanctions.” He said the remaining 10 are eligible for bilateral trade between India and Iran. A similar arrangement was made in 2012 when 45 percent of the dues were paid into escrow accounts in India of Iranian banks and the remaining settled in euros through an overseas bank.

According to the Financial Tribune, Mohammad Hussein Bani Asadi, director for the Indian Section at the Iranian Foreign Ministry, said following bilateral talks India’s Finance Ministry will send a directive to the UCO bank to make the payment mechanism active. The announcement was made on December 19 at the Tehran Chamber of Commerce, Industries, Mines and Agriculture with the theme of “India, a Widow Beyond Sanctions”. It was attended by the Indian Ambassador Saurabh Kumar and business leaders from the two countries.

Sanctions is nothing new for Islamic Republic’s forty year history. Hardship has been one of the characteristics during the post-revolution era. Muslims from all over the world, whether Sunni or Shi’ite, have admired the resilience of the Islamic Republic and the general public during this time.

While President Rouhani presented next year’s budget bill to the parliament, he admitted that the “unjust” U.S. sanctions will affect country’s lives and growth, but will not bring Iran “to its knees.”