Will Trump force Modi to unfriend Iran now that the US is out of the nuclear deal with Tehran?

Oil prices reached record highs in many Indian cities last week, sparking public anger and giving the Opposition ammunition against the government. Prices at the pump were lower five years ago, although crude was almost 30% dearer than it is today. If petrol and diesel are unreasonably expensive currently, much of the blame lies at Arun Jaitley’s door. As finance minister, he chose to capture the benefits of low prices in the form of taxes rather than passing them on to consumers. This could have been a justifiable means to repair government finances, provided the duties were lowered as global crude prices surged. The greedy Mr Jaitley, who tends to use tax collection figures as proxies for the economy’s health, could not bring himself to forgo revenue. Perhaps Piyush Goyal, who has taken charge of the Finance Ministry while Jaitley recovers from a kidney transplant, will set things right.

The continued rise in crude prices has surprised experts who believed that US shale could ramp up production quickly when prices become viable, thus capping any gains from the deal struck by Saudi Arabia and Russia two years ago to cut supply. Above $60 a barrel, in the view of these analysts, a glut of shale would quickly erase any cuts in OPEC (Organisation of the Petroleum Exporting Countries) and Russian output. That prediction, which seemed logical to me, now appears to have proven false, with Brent crude trading near the $80 per barrel mark. It looks like petroleum prices will continue to be a headache for the Indian government in the months leading up to next year’s general election.

Thanks to United States President Donald Trump’s policy moves this month, the headache got considerably worse. Trump unilaterally pulled out of the Joint Comprehensive Plan of Action, a deal struck in 2011 between Iran and the governments of the United States, the United Kingdom, France, Russia and China to curb the theocracy’s nuclear weapons programme in return for sanctions relief. By rejecting the Joint Comprehensive Plan of Action, Trump has now reversed most of Barack Obama’s signature foreign policy initiatives. He started by withdrawing from the Trans-Pacific Partnership trade deal, and proceeded to abandon the Paris Agreement on climate change. The ramifications of both those decisions will doubtless be wide, but are difficult to measure. The Joint Comprehensive Plan of Action withdrawal, on the other hand, presents immediate and calculable problems to nations and firms across the globe, and has left India facing a very difficult decision about its relationship with Iran.

How sanctions work

When sanctions first began to be imposed by countries, they involved downgrading financial relations and government-to-government contacts between the nations concerned. The United States discovered that this process tended to cause losses to American firms without doing sufficient harm to the target of the sanctions, which could usually find new partners and export markets. Using its great economic power, the US then began to apply secondary sanctions, a controversial form of extra-judicial authority. In the new formulation, the US not only sanctioned firms and individuals of the target nation, but also firms and individuals from any nation that did business with the target nation. In terms of social networks, this was the equivalent of not only unfriending and blocking an individual but threatening to unfriend anybody who stayed a friend with that person. Few global firms are willing or able to forgo all connections to the United States, including its banking system, and therefore tend to cave before American demands. Thus, after Trump announced renewed sanctions on Iran, not only did the American company Boeing lose out on lucrative orders to upgrade Iran’s ageing fleet, but so did Europe’s Airbus, though European governments have not backed Trump’s Iran sanctions.

Will Trump’s tantrum cause India to unfriend Iran? Iran is currently the third largest supplier of oil to India, behind Iraq and Saudi Arabia, and India had planned to double Iran’s contribution to the import mix because it offered better prices and credit terms. India’s overseas exploration firm ONGC Videsh Limited has made a large investment in Iran’s Farzad-B gas field, and recently promised to pump in $11 billion to develop the field. Aside from fossil fuels, India has committed billions of dollars to developing Iran’s Chabahar port as a trade line to Afghanistan and Central Asia. The US withdrawal from the nuclear deal has jeopardised all these plans.

With us or against us?

There is a positive spin to be put on India’s dilemma. Iran will certainly offer us a very good deal to keep selling its oil, and Saudi Arabia will probably make a competitive offer to cover any deficit caused by cancelling Iranian supplies. However, considering the venomous attitude to Iran of Trump’s new foreign policy team led by Secretary of State Mike Pompeo and National Security Advisor John Bolton, a negative outcome seems more likely at this point. Trump, Pompeo and Bolton, along with Israel’s hawkish Prime Minister Benjamin Netanyahu and Saudi Arabia’s de facto ruler Mohammed bin Salman, are spoiling for a fight with Iran, making war likelier than it ever has been through 40 years of American-Iranian hostility. In such an atmosphere, US waivers to continue business with Iran are going to be hard to come by. Instead, there will be a return to the “You’re either with us or against us” attitude of George W Bush. In such a scenario, it will be interesting to see whether Narendra Modi asserts India’s independence or gives in to US demands.