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How do the US sanctions on Iran impact India?
Publish Date: 10th August, 2018
Introduction
Donald Trump, the President of the United States, used his Twitter handle (yet again) to announce new sanctions on Iran. ‘Anyone doing business with Iran will NOT be doing business with United States’ reads his tweet. With the US government re-imposing sanctions on Iran, it means a lot to countries to India that rely on Iranian oil import to meet the annual energy need.
Global oil supply-demand equation changes dramatically
Iran is one of the biggest oil exporters in the world. It exported an average of around 2.2 million barrels/day (b/d) in the first six months of 2018. As a result, any ‘hard’ sanctions imposed by the US government could dramatically reduce Iran’s oil exports. This would have a significant impact on the global supply-demand equation. Other exporters would find it difficult to offset this deficit by more than 0.5 million b/d. And with oil production in Venezuela decreasing, this could aggravate the situation in a big way.
Click here to know about the impact of trade wars on India
Tough for India to import oil from Iran
Iran is India’s second largest oil supplier. It has supplied 0.68 million b/d of the 4.3 million b/d imported by India in June 2018. If the US imposes hard sanctions on Iran, it could become difficult for India to continue importing oil from Iran. The new sanctions come into effect from 5 November 2018. These sanctions include:
a) Purchase of National Iranian Oil Company (and other Iranian oil and gas companies)
b) Transactions by foreign financial institutions with the Central Bank of Iran
Once these sanctions come into effect, India will not be able to import oil from Iran without explicit exemptions by the US.
Impact of oil supply shock on India’s economy
Any rise in the price of oil above $80/barrel could have a big negative impact on India’s macro position. A rise in the price of oil by $10/barrel could result in a 50 basis points (bps) impact on the Current Account Deficit (CAD). CAD is a measure of how much India money India owes to the world in foreign currency. A rise in CAD means that inflation could increase by around 30 bps. This would also put a great deal of pressure on the Indian rupee.
Click here to read about the six effects of rising crude oil prices on the Indian economy.
No defence against rise in oil prices for investors
From the investor’s point of view, there is really no defence against the rise in oil prices for now. In the coming months, interest rates and bond yields are likely to stay high, if not move higher. Most defensive stocks like Maruti Suzuki, Colgate, HDFC Bank and Hindustan Unilever already trade at high multiples. The safest bet (in theory) is government-owned upstream oil stocks. But they too face the risk of unfavourable government actions through subsidies.
Conclusion
The re-imposition of sanctions on Iran has become a bureaucratic and economic nightmare for many countries, including India. Talk about being in between a rock and a hard place. Going forward, the best option for India is to obtain explicit exemption from the US to import oil from Iran.
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