The United States has announced it will not renew exemptions from its sanctions imposed on countries importing oil from Iran. These Significant Reduction Exceptions (SREs) will not be applicable to any nation post this decision. Initially granted in November last year for a total of 180 days to India and seven other nations, these exemptions are set to expire on the 2nd of May.
Nations Affected by the Non-renewal of Waivers
India, China, and US allies including Japan, South Korea, and Turkey are expected to face the biggest repercussions stemming from the non-renewal of waivers. The other three countries- Italy, Greece, and Taiwan- previously exempted have already reduced their imports to zero.
Impact of Sanctions on Iran
This significant reduction in oil export is set to deprive Iran of its primary source of revenue. In terms of global oil supplies, Iran’s 4% share of the global oil production in 2018 implies that sanctions on Iran are predicted to disrupt global oil supply chains. This disruption may lead to a considerable escalation in oil prices. However, the United States, Saudi Arabia, and the United Arab Emirates, being three of the world’s largest energy producers, have pledged their commitment to ensure that global oil markets remain adequately supplied.
Threatened Sanctions on India
The United States has warned India that its “escrow account,” used for Rupee-Rial trade, cannot continue to be operated following the May 2 deadline. An escrow account, which is a temporary pass-through account managed by a third party, is used during transactions between two parties.
| Facts |
|---|
| The US will no longer allow escrow accounts for Rupee-Rial trade after May 2 |
| Indian companies violating oil sanctions may face financial curbs |
| US, Saudi Arabia, UAE commit to keep global oil markets adequately supplied |
| India almost halved Iranian oil purchases since November |
Impact on Indian Oil Supply
The US ruling is predicted to irritate India, as the US has similarly imposed sanctions on another of India’s crucial suppliers, Venezuela. A rise in crude oil prices will broaden both the trade deficit and current account deficit, considering the value of imports escalates with crude oil. Each dollar increase in the price of oil raises India’s annual import bill by over Rs 10,500 crore. In case of a surge in global crude prices, the Indian deficit numbers could be significantly impacted due to the absence of Iranian oil.
Effect on Rupee and Inflation
If the trade and current account deficits widen, there could be an impact on currency. An increase in the import bill could put pressure on the rupee. As the rise in crude oil prices is passed onto the consumer, it could escalate inflation.
India’s Response to Sanctions
Following the enforcement of sanctions in November, Indian oil companies have nearly halved their Iranian oil imports. The Indian Petroleum Minister has indicated that India will branch out its imports from major oil-producing countries other than Iran.
India and Iranian Oil
As the world’s third-largest oil consumer, India fulfills over 80% of its crude oil needs and approximately 40% of its natural gas necessities through imports. India is Iran’s leading oil buyer after China. In 2018-19, India imported 23.5 million tonnes from Iran. In contrast, the previous year saw nearly 10% of its total 220.4 million tonnes of crude import coming from Iran. In 2018-19, Iran ranked as the fourth-largest oil supplier to India, and it remains uncertain whether other suppliers can provide similar benefits in terms of price and credit facilities.
