In the wake of Russia’s invasion of Ukraine, India has been scrambling to secure alternative sources of oil and fertilizers. India had to cease trade with Iran in fertilizers and crude oil due to the US sanctions imposed on Iran – prompting India to buy crucial imports from China, Russia, and the US. With negotiations aimed at bringing the US back to the Nuclear Deal and securing Iran’s full compliance with it, India is looking at re-opening its doors to trade with Iran. This is crucial because India is the world’s largest buyer of Urea and Iran is one of its biggest sources.

Iran Nuclear Deal: A brief history

Formally known as the Joint Comprehensive Plan of Action (JCPOA), the Iran Nuclear Agreement or Deal was a landmark agreement between Iran and some of the world’s leading countries to dismantle and deter Iran from enriching its nuclear stockpile. Iran agreed not to produce either the highly enriched Uranium or Plutonium that could be used in a nuclear weapon.

Proponents of the deal hoped that this would reduce conflict in the Middle East between Iran and its major adversaries – namely, Israel and Saudi Arabia. Signed under the Obama administration, President Donald Trump pulled out of the Agreement in 2018 as he was significantly unhappy with the terms of the deal.  In retaliation, Iran resumed some of its stalled nuclear development. Following his win, the new President, Joe Biden suggested to Iran that the US was willing to re-enter the deal if Iran came back into compliance. After initial talks, the jury is still out on the likelihood of a deal.
 

How did the sanctions on Iran impact India?

• New Delhi and Tehran had a barter-like mechanism for trade settlement. For example, Indian oil refiners were paying in rupees to a local Iranian bank and the funds were used by Tehran to pay for imports from India. However, trade was affected severely post the sanctions on Iran. When sanctions were imposed on Iran in 2015, it vicariously impacted India’s crude oil and fertilizers import.
• Strategically, Iran is crucial to India because of the Chabahar port. The port opens the pathway to Afghanistan, Central Asia and Europe. At the time of the sanctions, India was the second largest importer of oil from Iran. The sanctions severely impacted Iran’s ability to export oil – its main source of revenue. Any lack of supply from Iran, which has a wealth of oil, is certain to send oil prices through the roof, thereby increasing expenditure/cost for countries like India to procure oil.
• India has invested in Iranian gas and oil pipeline projects, and these sanctions hamper the return on such investments with companies facing restrictions on loans and opening back accounts. An arrangement meant that India would pay for 45% of its import of crude in Indian Rupees. The remaining amount was paid in Euros through banks in Turkey and Germany, for instance. Post sanctions, however, this avenue is completely shut. Consequently, India had to pay for its oil imports entirely in Rupees, maintained by Indian banks.
• Urea is a key fertilizer for India and the sanctions on Iran forced India to cease its trade in Urea, hampering the agricultural sector. The significance of Urea can be gauged from the fact that India imported 1.6 m tonnes of Urea from Iran in 2017, out of a total of 5.5 m tonnes imported during the year, that is nearly 30% of the total import. Difficulties arose due to lack of payment methods from sanctioned countries, such as Iran at the time. India turned to China and the Arab Gulf suppliers, majorly, to fill the void left by Iran. However, it still adversely impacted the flow of Urea import. 

 

How will India benefit if the US-Iran deal materializes?

A potential new deal for Iran is good news for India’s import of Urea, Crude Oil and its own trade relations with Iran – which had to be all but ceased due to the then US President Donald Trump’s withdrawal.

Impact on Crude Oil import:

 

Following Russia’s war on Ukraine, Russian oil companies and oil export has been severely hampered; they have been cut off from the world. Therefore, a major oil exporting country’s cessation has led to rising crude oil prices which, invariably, have impacted India as well. If sanctions of Iran are lifted, and the Biden administration strikes a new deal, resumption of trade with Iran on crude oil is a possibility.

Now that India has lost a major ally in Russia, Iran has offered to meet its oil and gas demands by resuming ‘Rupee for Rial’ trade.

This re-launch could possibly create ties worth USD 30 million between India and Iran. Prior to the sanctions, India was Iran’s second largest customer for oil.

In a new trade set up, any third-party will be excluded, thereby cutting international costs and simply dealing in Rupee-Rial.

Iran is also willing to discuss new supply routes for transporting natural gas to India after some projects on earlier pipelines had stalled due to Pakistan’s involvement.

India imports 85% of its crude oil and revival of trade with Iran will be a welcome boost, especially since Russian relations are uncertain.

 
Thus, a new deal between Iran and the leading global powers is in India’s best interests.

Impact on Urea (fertilizer) import:

India’s dependence on Iran for Urea as an agricultural fertilizer has been highlighted above and this was severely impacted when trade ceased with Iran following former President Donald Trump’s withdrawal from the deal. This prompted India to look for alternative sources. These sources turned out to be China, Ukraine and Russia. In 2019, due to supply chain disruptions caused by COVID-19, availability of Urea was restricted. China also added export restrictions due to high global prices. Now, the other two sources are engulfed in a never-ending war, with severe sanctions on Russia and calls for India to cease complete trade relations with the country, leaving India stranded when it comes to importing Urea.

Urea is important for India’s overall functioning, as 60% of the nation is still employed in agriculture and accounts for nearly 15% of India’s total economy.  
 

Conclusion

The sanctions imposed on Iran also made India suffer as the country lost a crucial market for fertilizers and crude oil which, while sourced from other countries, was not without disruptions. The emergence of the pandemic did not help in procurement either.

However, following the Russia-Ukraine war and the sanctions imposed on the former in retaliation, the world is need of Iranian oil and energy resources to make up for the lost Russian supply. Thus, a new deal is being considered with sanctions being possibly lifted. This is great news for India to meet its energy and Urea needs. However, nothing is concrete, and this is only indicative of a possible deal.