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President Donald Trump announced on 08 May 2018 that United States will be withdrawing from the hard won Nuclear Agreement with Iran and plans to re-impose sanctions.
In July 2015, a landmark ‘Nuclear Agreement’ was signed between Iran and six world powers (US, Germany, France, UK, China and Russia), as per which, Iran agreed to limit its sensitive nuclear activities for more than a decade in return for the lifting of sanctions.
On 16 January 2016, the International Atomic Energy Agency (IAEA) after due verification, announced that Iran had restricted its sensitive nuclear activities, as required by the Agreement.
Consequently, the Barack Obama administration lifted most of the sanctions on Iran, and on the same day, a prisoner swap deal was executed, in which four American-Iranians in Iran and seven Iranians in the US were also freed.
Reasons for the United States to Back out from the Iran Nuclear Agreement
There appears to be two major reasons for the United States to pull out of the Nuclear Agreement:
Trump Administration has decided to clearly take sides in the Middle East contest:
The arena of the Middle East, which has a strong sectarian divide, comprises of two primary players, i.e. Iran, which conforms to the Shiite sect and Saudi Arabia a country with Sunni sect orientation.
The Arab world, which has a majority Sunni’s, perceive that strengthening of Iran’s position in the region, may result in an Iranian Shiite expansionism.
Iran is already supporting the Houthi movement by the Shia’s in Yemen and is assisting the Assad regime to fight the Sunni rebels that are fighting to depose him in Syria.
Iran has been supportive of the Shiite government in Iraq and has vigorously abetted the ethnic divide and marginalisation of the Sunni’s in Iraq.
Sunni-ruled Gulf states have been viewing the Nuclear Agreement and the lifting of sanctions as a threat and a sign that the West is getting closer to Tehran, which actually fans their fears about Iran becoming even more daring in its interventions in the conflicts in Iraq, Syria and Yemen.
The pro-Iranian camp that is comprised of the Syrian government, the Iraqi government, Hezbollah and a range of non-state actors are being backed by Russia and the anti-Iranian camp, comprised primarily of Saudi Arabia, Israel, Egypt, Bahrain and the UAE are being supported by the United States.
Therefore, both these camps are seizing opportunities to recalibrate the regional order in the Middle East and are trying to set and push boundaries in their favour.
Now that the battle lines are clearly defined, both the United States and Russia have come out openly to support their respective camp.
The scrapping of the Nuclear Agreement by the US is a strong signal to the pro-Iranian camp, including Russia about the delineation of the opposing sides in this battle space.
Core Issue: Oil Trade
Iran is a major supplier of global oil and offers a stiff competition to Saudi Arabia, who has traditionally been the biggest ally of US in the Middle East.
Sanctions on Iran will restrict its ability to sell oil, which will create a global artificial scarcity and hence push the oil prices up, thus helping pro-US lobby.
Moreover, with sanctions on Russian oil already in place, it will break the growth momentum of emerging economies, especially China will get restrained and United States will win another card in its ongoing trade war with China.
Besides, USA has the largest reserves of Shale oil in the world. Shale oil as a substitute for conventional crude oil was discovered many decades ago. However, the cost of extracting Shale oil from oil Shale was prohibitive.
In 2006, by the application of a new ‘hydraulic fracturing’ technology and horizontal drilling method, it became relatively cost effective to extract Shale oil. Incidentally, the same year sanctions were imposed on Iran.
Hence, an artificial deficiency of crude oil, if created by keeping Iranian oil out of the global market, introduction of Shale oil as a substitute into the global market may be the biggest game-changer for the United States.
Reading Through the Fine Print of the US Game Plan
Interestingly, if we look at the bigger picture, the reasons for imposition of sanctions on Iran earlier, then lifting it in 2015 and now again sanctions are being re-imposed, reeks of queer coincidences and a much bigger game plan of the US:
Saudi Arabia, the Syrian rebels and ISIS are all Sunni’s and hence, Saudi Arabia’s earnestness to fight ISIS was a suspect right from the time go. Hence, it may be seen that Shiite Iran was brought in as a major player to fight the ISIS by lifting its sanctions momentarily.
Iran also acted as a counterweight for Saudi Arabia, lest it grew too big for its shoes for the US to handle.
Meanwhile Saudi Arabia continued to support sectarian violence in Iraq and has been assisting the rebels to oust Assad. Thus, keeping Russia at bay and Iran on its toes.
In this whole process, the war waging machinery required by all the above parties kept the defence arms and equipment manufactures back home working overtime, creating jobs and filling up their coffers.
Finally, now when the job is near completion and ISIS is almost defunct and ineffective, Iran is being once again caged to suit the US and its allies.
Implications for India of Imposition of Sanction on Iran
India will have to do some tight rope walking to maintain its balance while it faces up to the challenge of not antagonizing US and simultaneously ensure that the functionality of all the contracts/ associations mentioned below are not affected.
Source of Oil and Gas: India imports 80% of its oil demand. Saudi Arabia is one of the largest suppliers of oil to India, followed by Iraq, Nigeria, Venezuela and then Iran.
Nigeria replaced Saudi Arabia as the largest crude oil supplier to India after its oil exports to India last year surged by nearly 200 percent, supplying some 745,000 barrels per day.
The shift occurred, as most of the Indian refiners switched out their long-term contracts with Middle East suppliers, owing to the prevalent turbulent environment, in favour of African oil spot purchases.
Nonetheless, fresh sanctions on Iran will definitely affect the growing energy needs of India quite adversely. Moreover, once the Chabahar Port becomes completely operational, the availability and movement of oil to India from Iran will become highly cost effective.
Besides the above, India’s largest offshore drilling services provider Aban Offshore gets 35 per cent of its revenues from Iran.
Iran and India have also agreed to sign a contract to develop the Farzad B gas field, which is a natural gas field in the Persian Gulf by October this year.
Farzad B, has an estimated reserve of 12.8 trillion cubic feet of gas, and was opened in 2008 by a consortium of three Indian companies: ONGC Videsh, Oil India and Indian Oil.
Infrastructure Development: India had earlier constructed the Zaranj-Delaram road in 2009 which can give access to Afghanistan’s Garland Highway, setting up road access to four major cities in Afghanistan – Herat, Kandahar, Kabul and Mazar-e-Sharif.
The following deals for infrastructure development in Iran have already been signed by PM Modi during his visit to Iran:
India has signed a commercial contract for ten years (extendable) to build and operate the strategic Chabahar Port on Iran’s southern coast.
India is planning to invest billions of dollars in setting up industries, ranging from aluminum smelter to urea plants in Iran’s Chabahar Free Trade Zone.
Indian Public Sector Undertaking (PSU) Nalco will set up the aluminum smelter while private and co-operative fertilizer firms are keen to build urea plants provided they get gas at less than $2 per mmBtu.
At present, we spend Rs. 45,000 crore annually on urea subsidy, and if we can manufacture it in the Chabahar Free Trade Zone and move it through the port to Kandla and onward to hinterland, we can save that amount.
Indian railways PSU, IRCON will build a rail line at Chabahar to move goods right up to Afghanistan.
India Ports Global Pvt, a joint venture of the Jawaharlal Nehru Port Trust and the Kandla Port Trust, will invest $85 million in developing two container berths with a length of 640 meters and three multi cargo berths. The Indian consortium has signed the port pact with Aria Banader Iranian.
India, Afghanistan and Iran, also separately signed an agreement to set up a trade and transport corridor, with Chabahar as the hub.
India is planning to finance another road network inside Afghanistan to enable Iran access to as far as Tajikistan through a shorter route.
Improving Connectivity through access to Chabahar Port and International North South Transportation Corridor (INSTC):
At present India does not have a direct land access to Afghanistan and beyond to Central Asia, Russia and Europe, excepting, through Pakistan.
The distance between Kandla Port in Gujarat and Iran’s Chabahar Port is less than the distance between New Delhi and Mumbai.
Hence, the access to Chabahar Port will help India gain a foothold in Iran which will enable quick movement of goods first to Iran and then onwards to Afghanistan and Russia through a new rail and road link called the International North South Transportation Corridor (INSTC).
Thus, it will now be possible to go to Afghanistan and further to Russia and Europe without going through Pakistan.
India’s move to build and operate the Chabahar Port is also being viewed as a significant counterweight to China’s influence in Pakistan and its Road and Belt initiative.
President Trump’s decision to effectively scrap the Nuclear Agreement with Iran literally amounts to playing into the hands of Saudi Arabia and Israel. Israel has always viewed the Islamic Republic of Iran with skepticism and feels threatened because of its nuclear aspirations.
In case the deal breaks down in full, tensions across the Middle East could escalate to a dangerous level, as players on all sides rush to recalibrate their positions
mentioned below are not affected.