India and China Defy Trump on the Iranian Oil Boycott

Instead of deterring the two countries from trading with Iran, the sanctions seem to have strengthened economic ties.

Energy security is a top priority for a nation unable to meet the demand for hydrocarbons domestically. That is the key to understanding why India and China have refused to fall in line with US President Donald Trump’s ban on dealings with Iran’s oil, banking and transport sectors.

Last year, Iran was the third largest supplier of petroleum to India, after Iraq and Saudi Arabia. And it was the fourth third most important crude oil source for China after Russia, Saudi Arabia and Angola.

As in 2012 during the presidency of Barack Obama in the US, so now, India and China declared that they are bound only by the sanctions on a country imposed by the United Nations Security Council.

In 2012, to skirt having to deal with transactions in US dollars in which petroleum is traded, China used two small banks with no dealings in America to buy crude oil from Iran. Following Trump’s sanctions on Iranian oil in November 2018, China reverted to the earlier arrangement. Moreover, last year, the Shanghai exchange made arrangements to trade in oil in the Chinese currency, yuan.

In August, the state-owned China National Petroleum Corporation (CNPC) – ranked number 4 on the 2017 Fortune 500 list – took over French oil company Total’s 50.1% stake in the $4.8bn South Pars gas field project in Iran, raising its share to 80.1%, when Total decided to quit.

The Chinese oil giant entered Iran in 2004, when it acquired the MIS oilfield in the central highlands, in which it now holds a 75% stake. In 2009, it signed contracts with the National Iranian Oil Company (NIOC) to develop the North Azadegan oilfield near the Iraqi border. It began production in April 2016 of about 80,000 barrels per day (bpd) of crude oil along with natural gas. It continues to take petroleum from both oilfields.

“Our main cooperation with Iran is upstream investment,” said Hou Qijun, deputy general manager of CNPC. “Lifting equity oil is recouping our investment there.”

India and China have refused to fall in line with US President Donald Trump’s ban on dealings with Iran’s oil, banking and transport sectors. Credit: Reuters/Carlos Barria

More than just trade in hydrocarbons

There is more to Beijing-Tehran relations than trade in hydrocarbons. This became crystal clear during the meeting that Iranian foreign minister Mohammad Javad Zarif (whose resignation was rejected on Wednesday), accompanied by the oil minister, had with his Chinese counterpart Wang Yi in Beijing on February 19.

“I would like to take this opportunity to have this in-depth strategic communication with my old friend [Zarif] to deepen the strategic trust between our two countries and to ensure fresh progress of the bilateral comprehensive and strategic partnership,” Wang said.

In response, Zarif said, “We consider the comprehensive strategic partnership between Iran and China as one of our most important relations.”

The next day, reiteration of this came from Chinese President Xi Jinping. In his meeting with Ali Larijani, the speaker of Iran’s parliament, he referred to a long friendship and shared long-tested mutual trust between their two countries. “No matter how the international and regional situation changes, China’s resolve to develop a comprehensive strategic partnership with Iran will remain unchanged,” he declared.

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In other words, China was an all-weather friend of Iran. “We support Iran in playing a constructive role in maintaining regional peace and stability and are willing to closely communicate and coordinate on regional issues,” he added.

This was the polar opposite of Trump’s take on the Islamic Republic. He is relentless in accusing Iran of being the prime destabilising actor in the region.

The timing of this emphatic statement by Xi was remarkable. He was scheduled to meet the visiting Saudi Crown Prince Mohammed bin Salman, an arch foe of Iran, in the prestigious Great Hall of the People in central Beijing.

Saudi Crown Prince Mohammed bin Salman with Chinese President Xi Jinping. Credit: Reuters

India’s oil imports from Iran

With a very modest domestic petroleum production of 750,000 bpd in 2018, India imports 4.9 million bpd; the third highest figure in the world, after China and the US. To skirt the sanctions imposed on Iran by President Obama under the Iran Freedom and Counter-Proliferation Act of 2012, Tehran agreed to accept payments for its petroleum from India in rupees.

As the Indian rupee could not be converted to any foreign currency at current market rates for trade purposes, Iran had to use its Indian rupees to pay for imports from India, mainly food and medicine, which were not sanctioned under the US regime.

This time, on November 2, 2018, India and Iran signed a bilateral agreement to settle oil trades through an Indian state-owned UCO Bank in rupees. Since the Indian rupee is still not convertible to foreign currencies in trade transactions, means had to be found for Iran to spend its Indian cash.

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As agreed by New Delhi, Iran will use its rupees not only for its imports from India and for covering the cost of running its missions in the country, but also make direct investment in Indian projects. In addition, it is to be allowed to invest in Indian government debt securities. The direct investment provision will help Iran to participate in the expansion of the oil refiner Chennai Petroleum Corp Ltd, where Iran’s oil corporation owns 15.4% of the equity.

However, the income of a foreign company that is deposited in an Indian bank is subject to a withholding tax of 42.5%%. That led to the hold-up of the outstanding payment of $1.5 billion by the Indian refiners to the NIOC. In late December the Indian government granted an exemption from the withholding tax dating back to November 5, and the oil refiners paid up.

All in all, therefore, the net result of the Trump administration’s move against Tehran has led to the strengthening of economic ties between India and the Islamic Republic.

Higher oil exports

Little wonder that Iran’s oil exports in January at 1.1 to 1.3 million bpd were higher than 1 million bpd in December.

It was in that month that a barter-type system, known as INSTEX, was established by Britain, France and Germany to allow European businesses to skirt direct financial transactions with Iran, and thus evade possible US sanctions.

Despite these setbacks, it is unlikely that Trump will deviate from his blinkered unilateralism. He has shown himself to be adept in creating his own reality – his “alternative facts”, a memorable phrase coined by his counsellor, Kellyanne Conway, within days of his presidency.

Dilip Hiro’s latest book is Cold War in the Islamic World: Saudi Arabia, Iran and the Struggle for Supremacy.