Friday, January 3, 2020

India's economy will suffer eventually as the US attacks Iran!!


Stena Impero, a British Oil tanker, on its way to Saudi Arabia was dramatically boarded and seized by Iran’s Revolutionary Guard on July 19th, 2019. The Radio message received was:
“If you obey, you will be safe. Alter your course TO 360 degrees immediately” said the Iranian Naval Forces.

Note: In their language, altering TO 360 degrees means to change course so that the compass read 360 degrees or due north.
The oil prices spiked $2 per barrel after the incident.

Let's ignore the quoted lines for a while and try to understand the relation between the US and Iran. The above-quoted para will find its relevance in the last and most importantly, I promise that the justification of the headline too will be explained in the latter part. Just be patient and try to understand the history of animosity.
Pre 1979, Saudi Arabia and Iran constituted to be the twin pillars of the middle east providing stability in the region. Iran shared a much longer border with USSR and to keep the soviet’s influence off the region, the USA sold guns, bombs and virtually any conventional weapon to secure Iran as well the Saudi from soviets. Ultimately the goal was to secure the oil that the US was importing from the middle east. But things fell apart.

Act I: Iranian Revolution 1979

The Iranian Revolution overthrew the monarchy and Iran was declared an Islamic Republic led by Ayatollah Khomeini. But interestingly the monarch which was led by Mohammad Reza Pahlavi, the last Shah shared great relations with the United States. The fact remains that Shah was led to the throne because of the US. Shah was forced to leave his country and was admitted to the US for cancer treatment. Back in Iran, the new government in place demanded his return in order to face the trials for the crime he had been accused of. The demands were rejected by the US.
And then the Unthinkable happened.
Fifty-two American diplomats and citizens were held hostage for 444 days from November 4, 1979, to January 20, 1981, after a group of Iranian college students belonging to the Muslim Student Followers of the Imam's Line, who supported the Iranian Revolution, took over the U.S. Embassy in Tehran.
By Algerian Declaration, the 52 American citizens were set free and were able to leave Iran. One among other key provisions of the accord was that the US would not intervene politically or militarily in Iranian internal affairs.
Also the movie Argo is based on a similar incident of the "Canadian Caper" which was the joint covert rescue by the Canadian government and the CIA of six American diplomats who had evaded capture during the seizure of the United States embassy in Tehran, Iran, on November 4, 1979


The Iranian Revolution terrified the Kingdom of Saudi Arabia and which has led to the cold war between Iran and Saudi Arabia since then. The US is a very strong ally of Saudi. On May 20, 2017, U.S. President Trump and Saudi Arabia's Salman bin Abdulaziz Al Saud signed a series of letters of intent for the Kingdom of Saudi Arabia to purchase arms from the United States totaling US$110 billion immediately and $350 billion over 10 years. The statement has been mentioned to signify how Saudi Arabia is important to the states.

Act II: Tanker War

The Iran–Iraq War began on 22 September 1980, when Iraq invaded Iran, and it ended on 20 August 1988. The so-called "Tanker War" started when Iraq attacked the oil terminal and oil tankers at Kharg Island in early 1984. Iraq's aim in attacking Iranian shipping was to provoke the Iranians to retaliate with extreme measures, such as closing the Strait of Hormuz to all maritime traffic, thereby bringing American intervention; the United States had threatened several times to intervene if the Strait of Hormuz were closed. As a result, the Iranians limited their retaliatory attacks to Iraqi shipping, leaving the strait open to general passage.
How the US was involved in the Iraq-Iran war?
1.    Iraq acquired 60 multi-role military helicopters (MD 500 Defender) directly from the United States in 1983
2.    USS Stark was deployed to the Middle East Force in 1984 and 1987. The ship was struck on 17 May 1987 by two Exocet anti-ship missiles during the Iran–Iraq War fired from an Iraqi Dassault Mirage F1 aircraft. The Reagan administration, however, attributed the blame to Iran for its alleged belligerence in the underlying conflict.
3.    American support for Ba'athist Iraq during the Iran–Iraq War, in which it fought against post-revolutionary Iran, included several billion dollars' worths of economic aid, the sale of dual-use technology, non-U.S. origin weaponry, military intelligence, and special operations training. However, the U.S. did not directly supply arms to Iraq
4.    Iran Air Flight 655 was a scheduled passenger flight from Tehran to Dubai via Bandar Abbas, that was shot down (the flight was mistaken for a jet fighter) on 3 July 1988 by an SM-2MR surface-to-air missile fired from USS Vincennes, a guided-missile cruiser of the United States Navy. The aircraft, an Airbus A300, was destroyed and all 290 people on board, including 66 children, were killed. In 1996, the governments of the United States and Iran reached a settlement at the International Court of Justice which included the statement "...the United States recognized the aerial incident of 3 July 1988 as a terrible human tragedy and expressed deep regret over the loss of lives caused by the incident.”

US Army helicopters protecting the Oil Tankers crossing the Strait of Hormuz

Act III: Iran Nuclear Deal

By 2002, Iran was fighting multiple proxy wars and the US feared that their Nuclear weapon may fall into wrong hands.
In 2002 State of the Union Address, George W Bush referring to North Korea and Iran mentioned that “States like these and their terrorist allies constitute an axis of evil, arming to threaten the peace of the world” The term ‘axis of evil’ has got a lot of repetitions after then to pinpoint the common enemies of United States.
UN report also revealed that Iran has carried out activities relevant to the development of a nuclear explosive device. The mutual distrust between the US and Iran boiled over. Iran has refused to satisfy legitimate concerns about the nature of its nuclear program. Eventually, The US announced sweeping sanctions against Iran
[On June 24, 2010, the United States Senate and House of Representatives passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), which President Obama signed into law July 1, 2010.]
The sanctions again brought Strait of Hormuz into the limelight as Iran threatened that they would not allow a single drop of oil to pass by. The US retaliated saying that they were well prepared to take any action. The economy of Iran contracted for the first time in a decade after the sanctions as oil makes up 80% of their exports.

The Iran nuclear deal framework was a preliminary framework agreement reached in 2015 between the Islamic Republic of Iran and a group of world powers: the P5+1 (the permanent members of the United Nations Security Council—the United States, the United Kingdom, Russia, France, and China—plus Germany) and the EU

In all the three acts, a name that has come often is the Strait of Hormuz. A third of the world’s liquefied natural gas and almost 25% of total global oil consumption passes through the strait, making it a highly important strategic location for international trade. The jugular of the world economy seems to have found its relevance again and again whenever Iran has been placed in a discomfort position.

Act: IV: Withdrawal from Iran Nuclear Deal

On May 8, 2018, United States President Donald Trump announced the United States was withdrawing from the deal.
Iran has the world's fourth-largest oil reserves. But sanctions prevented it from capitalizing on that resource. As a result, Iran is only the world's seventh-largest oil producer, pumping 4.5 million barrels per day. In 2018, it exported 1.9 million barrels per day. Without sanctions, Iran had hoped to double that amount once it built up the necessary infrastructure. With the reinstatement of sanctions, exports were projected to plummet to 945,000 barrels per day. In 2018, Iran's unemployment rate rose to 13.8%. Sanctions caused its currency, the rial, to plummet. That's caused its inflation rate to skyrocket to 55% in 2018.
On July 19th, 2019, Stena Impero, a British Oil tanker, on its way to Saudi Arabia was dramatically boarded and seized by Iran’s Revolutionary Guard. It was passing through Strait of Hormuz. I had said that the quoted text will find its way.
The above clearly states how US and Iran relations have only deteriorated over the years but most importantly mentions as to how the strait is used as leverage by Iran to oppose their oponents

Act V: Things that could have been avoided 

These 4 incidents happened as the world was on the verge to enter a new decade.
1.    December 28, 2019: A US civilian contractor was killed Friday in a rocket attack on a base near Kirkuk, Iraq, where US service members and civilian contractors were located. The attack was linked to groups backed by Iran.
2.    The 2019 U.S. embassy attack in Iraq happened in Baghdad, Iraq, on 31 December 2019. Iraqi militiamen, pro-Iran protesters, and supporters of the Kata'ib Hezbollah, an Iran-backed militia, attacked the U.S. embassy in response to U.S. airstrikes on 29 December 2019 that killed 25 fighters of Kata'ib Hezbollah in Iraq
3.    Maj. Gen. Qassim Suleimani (architect of nearly every significant operation by Iranian intelligence and military forces over the past two decades) was killed in an American drone strike in Baghdad on Friday.
4.    His death is a considerable blow to Tehran, and Iran’s supreme leader, Ayatollah Ali Khamenei, called for retaliation on Friday and for three days of national mourning.

The #WWIII and #Worldwar3 were the trending topics on Twitter on 3rd January. But the most significant point remains that India has a lot to lose in these things.

Point A: The Strait of Hormuz is again going to be affected in between this feud. And this is something we can very sure about as we have read about the history of the nations. India is in a no state to handle further distress to the economy as the current economic slowdown has come at a time when the oil prices are at a record low. This, in fact, has been stated as a cushion and widely mentioned that this government has been lucky in this regard. But the fact remains that the spike in the oil prices is going to make things worse. Iran’s Oil imports to India has dipped to 1.7 mt in the current fiscal year down from 23.9 mt in 2018-19. But still, we import 226.5 mt (during FY19) that has cost India about $111.9 Billion. This is when the crude prices are at $61.18 per barrel (It was $106 per barrel in July 2014)


The News: Oil prices jump after top Iranian general killed by US – BBC

Point B: Reliance Industries toppled the IOCL as the largest company in India in terms of revenue. I am mentioning this fact because this company is one of the major index heavyweights of Nifty50 and Sensex. Reliance mentioned earlier that they have the plan to become the zero-net debt company. Their plans have been drawn on the altars of partnership that they are looking forward to forge with Aramco and BP (Both being, Oil-based company). With the recent developments in the oil market, we could see that a chunk of investors’ money wiping out because of the escalation.
Point C: Nevertheless, the positive sides are that macroeconomics factors have been quite stable for the nation. We have healthy foreign exchange reserves. The data reached an all-time high of 413.0 USD bn in Oct 2019 and a record low of 1.1 USD bn in Jun 1991 (just for a perspective). This would mean that we have enough cushion to shrug off the exchange rate fluctuation that the economy may face in the wake of the oil price fluctuations. Though weak rupees would mean a lower dollar return for foreign investors and making India an unattractive market for investment.
Point D: In the domestic stock market, oil-linked stocks like Spice Jet, InterGlobe Aviation; Paints stocks like Asian Paints, Berget Paints, and Nerolac may face the brunt. BPCL, HPCL, and IOCL are too not going to be spared

Point E: For a country like India which meets 80 percent of its oil demand through imports, any further rise in crude prices may have an impact on government finances. Every $10 a barrel rise in crude oil prices expands India’s current account deficit (CAD) by 0.4 percent of GDP. Every 10 percent increase in crude oil prices can push up the inflation rate by 20 basis points.
The preventive measures for the same distress may find its way to the highly talked next budget.


No comments:

Post a Comment

Ads Inside Post