Indian Decade

Iran’s Oil and U.S.-India Ties

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Indian Decade

Iran’s Oil and U.S.-India Ties

India’s oil imports from Iran have strained ties with the U.S. But they’ve worked things out for now.

Less than a month before the latest round of U.S. sanctions were set to take effect against Iran’s oil industry, the Obama Administration announced  that it had exempted India from the tough new measures. Under the law that was enacted late last year, countries importing oil from Iran were given until the end of June 2012 to “significantly reduce” the volume of their oil purchases or face U.S. sanctions. The exemption, also given to six other nations, protects India’s financial institutions from facing the severe penalties for doing business with Iran, allowing them to continue to enjoy crucial access to the U.S. financial system. 

Although somewhat predictable, Washington’s decision to grant the sanctions waiver to India is significant. It not only recognizes New Delhi’s efforts to reduce its oil imports from Iran, but it also illustrates the extent to which the United States and India are committed to working through potential differences with one another and maintaining a strong and robust partnership.

The U.S. sanctions campaign against Iran emerged as a formidable challenge to traditionally strong U.S.-India bilateral ties. Aimed at pressuring Tehran over its nuclear weapons program, the Obama Administration targeted the country’s lucrative oil trade by asking importers of Iranian crude to significantly curtail their purchases. New Delhi, which imports 80 percent of its oil from abroad – and as much as 12 percent from Iran alone – suddenly found itself in a difficult and precarious position: it relied heavily on Iranian crude to help meet its voracious energy needs, but risked exposing its institutions to U.S. sanctions and jeopardizing the strategic partnership if it continued to import oil from Tehran. 

The United States and India quickly found themselves at odds. Officials in Washington urged India to cut its dependence on Iranian oil and characterized New Delhi’s relationship with Tehran as “offensive.”  Policymakers in New Delhi publicly rebuffed Washington, declaring that American sanctions didn’t apply to India, and that national interest, not U.S. pressure, would guide its decision-making calculus towards Iran. In February 2012, India was the world’s leading importer of Iranian crude and risked being slapped with U.S. sanctions if it didn’t take steps to “substantially” reduce its dependence on oil from Tehran. Many observers alleged that a major crisis had erupted between the world’s oldest and largest democracies and raised larger questions of whether U.S.-India relations had been oversold.   

While such claims remain unfounded, there’s no doubt that the Iran issue tested the durability of the strategic partnership between Washington and New Delhi. Although the two countries seemed to have reached an impasse on the surface, they both began quietly working towards a solution. New Delhi, for its part, started searching for alternative sources of crude oil from suppliers in the Middle East and elsewhere. Publicly reaffirming its sacrosanct strategic autonomy, India privately directed its state owned oil refiners to begin cutting Iranian oil imports. American officials, on the other hand, made clear to their Indian interlocutors that they properly understood the extent of India’s energy needs and were not expecting New Delhi to completely halt all of its oil imports from Iran.  Obama administration officials, including Secretary of State Hillary Clinton, publicly praised India for the steps it was taking to diversify its energy imports.

By May 2012, trade data indicated that India had reduced its Iranian oil imports by 10 percent from the month before, and by nearly 40 percent from the same point last year. New Delhi maintained that it reduced imports out of a desire to diversify its energy supply, and not in response to American pressure. However, there’s little doubt that the issue’s impact on India’s ties with the U.S. was damaging.

Recognizing India’s efforts towards this end, Washington announced that it would grant New Delhi the sanctions waiver. In many ways, the decision isn’t a surprising one. Failing to grant India the exemption and exposing it to American sanctions would have likely resulted in a virtual collapse of the U.S.-India strategic partnership, something officials in both capitals simply would not have allowed to happen. The waiver announcement also came just a couple of days before the third annual U.S.-India “Strategic Dialogue,” which witnessed senior officials from both countries coming together to discuss issues of importance to the bilateral relationship. Neither side wanted the oil issue casting a shadow over the highly touted meeting.

By working to find an accommodation over New Delhi’s oil imports, India and the United States have successfully addressed a significant challenge to their bilateral ties, although perhaps only for the time being. After issuing the exemption, U.S. officials clarified that the sanctions waiver is only valid for six months, making it almost certain India’s oil imports will once again come under America’s eye. It’s clear that the issue is far from definitively resolved and is likely to persist as a challenge for their relationship. However, in the immediate future, both countries have demonstrated a willingness to work on their differences in a pragmatic and meaningful way, demonstrating a strong, continued bilateral commitment to their partnership.   

Ronak D. Desai is a fellow at the Truman National Security Project.