India: Why Bowing to US Pressure on Iran Oil Imports Will Hurt India

Last Updated: 18 September 2018
Article by Piyush Joshi
  • For every $1 increase in crude oil prices, the impact on India is likely to be around $ 1 billion.
  • India would have to shift from reasonably priced Iranian crude to more expensive Saudi crude.
  • Legally India can and should put the US actions to test.

"Don't you know the Golden Rule Boy? Whoever has the gold makes the rules"

This one liner of the evil Wazir from the 1992 Disney Hit "Aladdin", aptly summarizes the attitude of President Trump's regime in the US, albeit on the somewhat self-assumed, but factually debatable notion that it has the gold. Presently, the starkest display of this attitude in its full form, lies in its dealings with Iran and countries having economic relations with Iran such as India.

The Joint Comprehensive Plan of Action (JCPOA) was executed on July 14 2015 between Iran, the five permanent members of the UN Security Council (China, France, Russia, United Kingdom, United States), Germany and the European Union. The Security Council then endorsed the JCPOA by unanimously adopting Resolution 2231 of 2015. This resolution provided for the termination of the provisions of the previous Security Council resolutions that had imposed specific restrictions applicable on all members. Under Article 25 of the Charter of the United Nations, member states are obligated to accept and carry out the Security Council's decision, and hence decisions of the Security Council become international law. Thus, Resolution 2235 of 2015 converted what was initially a political agreement between specific nations into legal obligations that are binding under the UN Charter. In fact the Resolution 2231 of 2015 specifically "calls upon all Member take such actions as may be appropriate to support the implementation of the JCPOA, including by ... refraining from actions that undermine implementation of commitments under the JCPOA ".

Even outside the UN Charter framework, the JCPOA is clearly a "treaty" and governed by the Vienna Convention and the paramount principle of international law of pacta sunt servanda – the notion that treaties constitute binding legal obligations that must be performed in good faith.

Since December 2016 and steadily through 2017, the US government acting particularly through its President had been seeking to undermine the deal, which in itself was a violation of the Security Council Resolution. Also, under the UN Security Council Resolution, withdrawal from JCPOA and re-imposition of sanctions is possible on basis of "significant non-compliance". Although the term "significant non-compliance" is not defined it would still need some basis for a member to claim that "significant non-compliance" has occurred.

US' Unilateral Withdrawal from the JCPOA

On May 8, the US announced a "unilateral withdrawal" from the JCPOA and its President directed the various agencies of the US to re-impose sanctions. The statement released by the White House provides no concrete reasons, other than claiming that JCPOA "failed to protect America's national security interests" and that Iran has been using the money obtained from the economic activity allowed pursuant to the JCPOA, to fund "military build-up and its terrorist proxies such as Hezbollah and Hamas". None of the other members of the UN Security Council have endorsed this view. The said treaty is therefore still very much part of international law and also binding on all members under the framework of the UN Charter.

By undertaking the unilateral withdrawal the United States has closely aligned itself with Israel and Saudi Arabia. The US has also repealed its domestic laws that had been enacted to implement the JCPOA and has instead enacted a domestic law triggering the "wind down" of US entities that had obtained permissions under the JCPOA regime to undertake business with Iran. Further, following the "National Security Presidential Memorandum" issued on May 8, 2018, the US will impose secondary sanctions that will also impact non-US companies that carry out certain activities with Iran. This will get triggered at end of the "wind down" periods of 90 days and 180 days. Non-US companies dealing with Iran in relation to petroleum related transactions will get impacted at end of 180 day period, which will end on November 4, 2018.

Impact on India

It is here that India gets materially and adversely impacted. The JCPOA had resulted in lifting of sanctions and opening up of the access to oil from Iran and India presently imports 10.4 percent of its total quantity of imported crude oil from Iran.

The so called "wind down period" being applied by the US under its domestic laws will end on November 4 and Indian companies including BPCL, HPCL, IOCL, Reliance, GAIL that have dealings in various petroleum products with Iran, including importing crude oil and refining will get hit and would need to comply or face actions from the US government. The economic impact of shifting of 10.4% of crude import from reasonably priced oil from Iran to other international sources will be substantial. As a ball park, for every $1 increase in crude oil prices, the impact on India is likely to be around $ 1 billion.

India would have to shift from reasonably priced Iranian crude to more expensive Saudi crude apart from having to address various national security concerns.

The US of course issues "waivers" and is essentially seeking deals relating to grant of such waivers. The crucial issue then is whether India is in a position to bargain hard in relation to obtaining these "waivers".

Options for India

However, legally India can and should put the US actions to test. Raising legal disputes is within the international framework and India should take the lead to test the unilateral "golden rules" being written by US and make it answerable. This needs to be done both at the level of the International Court of Justice, as well as the WTO.

India should also file, in the appropriate US Courts, a tortious claim against the US for issues arising in relation to the unilateral violation of the applicable framework of international trade and consequential economic damage to India of equivalent quantum.

These circumstances also bring to light the present pressing need for India to enacting an Indian international economic law that would enable India to take action under Indian courts against foreign Governments that cause economic harm or damage in violation of international law. In this regard, we can emulate the US' Countering America's Adversaries Through Sanctions Act (CAATSA), to reserve rights in respect of entitles that deal with terrorist organisations active in India.

Originally published by CNBC TV18, July 2018

Piyush Joshi, partner, Clarus Law Associates, specialises in Energy, Infrastructure Projects and Project Financing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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