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Trump sanctions will force Indian entities to use Euro, Yen or Turkish lira for payments to Iran

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In the pre-Iran deal period, there was a carve-out for our involvement in Chabahar, on account of its contribution to facilitating trade and development efforts in Afghanistan, also a declared US objective.

US President Donald Trump’s announcement Tuesday that the US would end its adherence to the Joint Comprehensive Plan of Action (JCPoA), which gives Iran sanctions relief against constraints it accepted on its nuclear activities, will have implications for India.

In subsequent guidance issued by the US department of treasury, it has been indicated that some trade and financial activities with Iran would become sanctionable after 6 August, and others after 4 November.

More specifically, Iran would not be able to trade in US dollars after 6 August. Indian entities, as a result, will not be able to transact in US dollars for any trade and financial dealings with the Iranians. Such transactions, if they occur, would be blocked and potentially confiscated or penalised by the US.

This will force Indian entities to use the Euro, Yen or Turkish lira for payments to Iran. These options, however, are not seamless. There are limits to values that can be transacted, and banks in these countries are reluctant to facilitate dealings with Iran, fearing US scrutiny and sanctions. Their priority, in any case, would be to first facilitate the transactions of their own entities.

From 4 November, oil imports from Iran would be a target. The ‘guidance’ has clarified that, as in the pre-JCPoA period, importers would have to show a “significant reduction” in imports between now and November 4. There is no clarification on what “significant reduction” means. In the past, it was administratively interpreted as a 15-20 per cent reduction in volumes over six months. To avoid sanctions, importing entities will have to show plans for similar reductions in six-month cycles.

This poses a challenge for refineries geared towards processing Iranian crude. However, the pre-JCPoA experience would have enabled them to have strategies for such an adjustment.

The bigger difficulty is payment for whatever is imported. US dollars cannot be used. European banks do not want to transact significant volumes, fearing US scrutiny or penalty. Earlier, the US had specifically authorised European and Turkish banks to facilitate some payments, on a case-by-case basis, on request. Huge rupee balances had built up in India for payments that could not go through with those routes. South Korea and Japan did not face similar problems since their exports to Iran were close to their level of imports. One way out would be for Iran to buy more of its requirements from India.

The third challenge could be on Chabahar port. Trump said that any entity that contributes to Iran’s nuclear programme would be sanctioned. Much would depend on how loosely this is interpreted, including whether a contribution to Iran’s economy is also seen as such. Further, the US has also sanctioned Iranian entities linked to the Revolutionary Guard and others, who are also deeply embedded in Iranian economic activity. Transactions in the context of our involvement in Chabahar could come under US sanctions if such entities are assessed as involved on the Iranian side.

In the pre-JCPOA period, there was a carve-out for our involvement in Chabahar, on account of its contribution to facilitating trade and development efforts in Afghanistan, also a declared US objective. This would need to be taken further since the security situation in Afghanistan remains grim, parliamentary and presidential elections are due, and declining economic activity is seen as a major cause for disaffection.

Beyond the specific implications for India, Trump’s decision raises issues about the nature of US domestic politics, the value it attaches to the views of allies, and its recurrent tendency towards unilateralism.

The International Atomic Energy Agency, the UN, European countries and several US officials, including defence secretary James Mattis, had said repeatedly that Iran was complying with the JCPoA’s provisions.

French President Emmanuel Macron, German chancellor Angela Merkel, and British foreign secretary Boris Johnson had visited Washington over the past weeks to persuade the President to stay with the deal, and look at working on a subsequent one to address US concerns on Iran’s ballistic missile programme, sunset provisions in the present deal, and Iran’s policies in West Asia.

It was clear, however, that Trump wanted to undo the signature foreign policy achievement of President Obama. Republican leaders in the US Congress have come out in support of Trump, while Democrats have criticised him.

The French President, German Chancellor, and British Prime Minister have issued a joint statement expressing “regret and concern” and their own “continuing commitment to the JCPoA”. They also urged “the US to ensure that structures of JCPoA can remain intact”, hoping that the US will not sanction other countries’ activities that are consistent with their own commitments under the deal.

Iran President Hassan Rouhani has said that, before deciding on further steps, Iran will watch how other countries continue to implement their part of the bargain. Israel and Saudi Arabia have strongly supported Trump, in view of their strategic rivalry with Iran.

Trump’s decision calls into question the domestic-politics-driven reliability of US’ international commitments. It highlights the dangers of unilateralism when one entity has a disproportionate weight in the international system. However, self-interest will drive economic entities and countries to adjust to or negotiate with US requirements.

Arun K. Singh is former Indian ambassador to the US.

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