The Indian government recently announced that it will insure domestic oil refineries so they can continue importing Iranian oil. Can you explain the purposes and objectives of the plan?
In the past Indian companies insuring domestic refineries for their Iranian oil shipments hedged against the risk of losses through European reinsurance companies. Due to the tightening of the sanctions, however, European reinsurance companies are no longer willing to provide coverage for Iranian oil shipments to India. In order to continue the oil trade, India’s Petroleum Ministry recently announced that it will step in as the guarantor of last resort by establishing a special reinsurance fund. This plan has just been announced and the exact details will be unveiled in coming weeks.
The U.S. enacted additional sanctions against Iran that went into effect in February, which prohibit payments for Iranian oil imports in gold and tightened the loopholes in previous sanctions that enabled some financial institutions (eg in Turkey) to route payments for Iranian oil. How are these effecting India’s ability to import Iranian oil?
As always it is a cat and mouse game. As long as the sanctions keep getting tighter, India will attempt to find ways to circumvent them.
Over the last 18 months or so, India has reduced the amount of oil it imports from Iran, but refused to terminate the trade. It had been purchasing Iranian oil by processing about half the payment in euros via Turkey’s Halk Bank, and the rest in rupees via a local Indian bank, UCO.
Western sanctions have led Halk Bank to recently to pull out of this arrangement, creating difficulties for India’s refineries, particularly the Mangalore Refinery and Petrochemicals, Iran’s largest Indian oil buyer.
Mangalore Refinery and the other importers are currently exploring ways to pay for Iranian oil via a combination of rupee-denominated bank transactions and barter trade, wherein India would pay for imported oil with exports of soft commodities such as wheat and manufactured goods like pharmaceuticals. Since the 2013-14 financial year in India just started in April, these contractual agreements are in the process of being renegotiated.
There have been numerous reports of OPEC members like Saudi Arabia and Iraq saying they will use their own oil reserves to make up for any reduction in Iranian oil that India makes. Nonetheless, India continues to import Iranian oil. I am curious to know why it is so tied to Iran as a source of oil. Is this solely due to economics or are there other strategic and ideological factors involved?
Yes, it is really a confluence of these three factors: economic, strategic, and ideological. Economically it makes sense for India to continue to import Iranian oil because it signs yearly contracts with Iran which allows it to purchase oil at cheaper prices. Given India’s slowing economy, rapidly rising energy needs and the 2014 national elections, Indian policymakers are not eager to see a rise in the price of energy. Also, in the absence of more choice and existence of demand from multiple markets, Saudi Arabia (India’s largest oil supplier) will not have any incentive to cut crude prices. This will further buttress its dominant position in this market. It will also introduce an element of uncertainty in oil supplies to India, as Riyadh could call the shots in any negotiations.
On the other hand, India has traditionally taken a diplomatic position of resisting Western hegemony or at least what it views as Western hegemony in the international arena — particularly when its own national interests are threatened. To some degree, Delhi views attempts by the United States and EU to dictate which countries it can and cannot purchase oil from this perspective, and therefore has an ideological interest in defying — or only partially complying with — the demands of western countries. To be sure, Delhi does not endorse the military component of Iran’s nuclear program, putting its views in line with those of Western countries.
There are also strategic interests at work. To begin with, India has long-standing cultural, social and economic ties with Iran, which it is determined to preserve. Moreover, it’s important to remember that the sanctions, and the restrictions they pose, are not a near-term problem, meaning Indian cannot terminate supplies for a few months to satisfy the West and wait for the sanctions to be lifted. These sanctions will be in force for the next year and a half or two years at the very least, and possibly for up to five years. Furthermore, several Indian public-sector companies (such as Gas Authority of India) are heavily invested in Iran’s energy sector and do not wish their deals to be stalled indefinitely. Thus, if India acceded to the West’s demands it would be eliminating an important aspect of its bilateral relationship with Iran for years to come, while also undermining its own energy security.
Moreover, India is seeking to enhance its global standing in a number of ways, and is seeking to increase its importance as a large developing market. An important part of its global strategy is to champion the importance of revised multilateral institutions. This is evident from its bid to win a permanent seat on the UN Security Council as well as through various efforts with BRICS. India feels that extant international institutions are failing to consider the interests of strategically important, but economically weaker, countries like Iran.
What about U.S.-Indian relations? Could this potentially imperil this bilateral relationship?
I don’t think so. I think both countries understand the importance and potential of the bilateral relationship and are eager to minimize the impact the Iranian oil issue has on the larger relationship. While the U.S. is bound by its own domestic politics, it also understands India’s strategic and economic concerns and doesn’t want to alienate Delhi, especially with China rising. In turn, Delhi has responded to U.S. interests by substantially cutting Iranian imports and opposing the military component of Iran’s enrichment program. In that sense I think the decision to include a waiver clause in the sanctions legislation anticipated the risk of alienating countries such as India with these sanctions.
Finally, switching gears here, I am curious to know your thoughts about the Novartis ruling from earlier this week. How is it being seen in India and what are the implications of it for the country? Will this, for example, reduce FDI in certain sectors besides pharmaceuticals?
The ruling has been very widely welcomed in India and I suspect it will be in many other developing countries.
The ruling has to be understood in the context of ongoing efforts by the Congress-led national government to provide public healthcare to the larger number of citizens (from the current 22% of the population to about 52%). For instance last year Prime Minister Manmohan Singh announced the government would aim to provide Universal Health Coverage (UHC) and the government subsequently passed two large programs: National Urban Health Mission (NUHM) and Free Essential Medicines.
In order to make good on these promises India has to find a way to control spiraling costs of healthcare. Pharmaceuticals present an inevitable area for the government to do this given their inflated prices (drug prices have reportedly risen 40% between 1996 and 2006). For example, Glivec, the drug in question in the Novartis case, was a cancer treatment that the company charges about $2,600 a month for, when generic brands can provide a similar drug for just $175 a month.
It’s also important to emphasize that the impact this ruling will have on foreign companies is limited. Currently India’s urban households account for nearly 75% of the entire domestic pharmaceutical market. Affluent individuals will simply not go to public healthcare institutions to receive treatment, given the low quality and inadequacy of these facilities. Instead they will continue to use the private healthcare sector which this ruling doesn’t affect. In fact, by increasing rural access to healthcare, and therefore the overall consumption of drugs, private companies may find a large market in the longer term.
The ruling will not affect FDI in other sectors; in fact it is unlikely to affect investment in the pharmaceutical sector either given India’s market potential. For investors, there are tremendous opportunities in such areas as infrastructure, auto and retail – the hurdles here have to do with legislative constraints, not the Supreme Court’s ruling on Novartis.