Lanka also can roll out the barrel

It was as clear as floating oil on a glass of water that Sri Lanka was among the countries that were worst affected by the tough economic sanctions imposed by the United States on Iran in December 2011. Although the sanctions were aimed at forcing Iran to abandon any nuclear weaponisation programme, they also hit several developing countries. This is because the US warned that it would cut off from the US financial system foreign firms, state-owned or otherwise, that did business with the Iranian government.

For the oil-import-dependent economy of Sri Lanka, the sanctions dealt multiple blows.  Prior to the crippling sanctions, Sri Lanka had been importing crude oil from Iran on concessionary terms. Iran accounted for almost 93 percent of Sri Lanka’s oil needs. Sri Lanka had been importing 39,000 barrels a day. After the sanctions were placed, Sri Lanka’s oil-import bill rose sharply. This rise in the oil import bill added more fuel to the fire as far as the economy was concerned, while the country was trying to recover from a 30-year separatist war. 

Although the sanctions regime had a clause that allowed some countries to import a limited amount of crude oil from Iran, Sri Lanka could not make full use of this facility. This was because international insurance companies avoided dealing with Iran, for fear of being punished by the United States.  Even Sri Lanka’s banking sector refused to open letters of credit for the Ceylon Petroleum Corporation, the country’s chief importer of oil. Iran, meanwhile, offered Sri Lanka a loan facility, in the hope that it could persuade Sri Lanka to buy Iran’s oil. But Sri Lanka could not find tankers to go to Iran, because no shipping company wanted to be blacklisted by the US.

Sri Lanka’s case was made worse because its only refinery at Sapugaskanda – a half-a-century-old national asset -- had been fine-tuned to refine the type of crude found largely in Iran.  Earlier, Teheran had promised US$ one billion in aid to upgrade the Sapugaskanda refinery. But with the sanctions tightening the grip on Iran, the aid was deferred indefinitely. When the sanctions began to hit Iran, Sri Lanka’s oil supplies ran thin, bringing the Sapugaskanda plant to a virtual halt. A desperate Sri Lanka bought crude from Oman, Saudi Arabia, Singapore and Vietnam at much higher prices. But this caused more problems. The Sapugaskanda plant suffered regular breakdowns because it could not cope with the high sulphur content of non-Iranian crude.  


Iranians hold street celebrations following a nuclear deal with major powers, in Tehran July 14, 2015. Reuters

Citing the desperate situation it had found itself in as a result of the sanctions on Iran, the then Sri Lankan government appealed to the US. But Washington, with which the then government had locked horns over war crimes allegations, refused to budge, prompting President Mahinda Rajapaksa to describe the December 2011 sanctions on Iran as sanctions on Sri Lanka.  However, over the years, helped by the falling oil prices and adjustments to the refinery, Sri Lanka managed to overcome the crisis to some extent. 

Against this backdrop, the news on Tuesday that Iran and the world powers have reached a historic deal that will end the crippling sanctions on the Islamic Republic, has made Sri Lanka jubilant.  With Iranian oil glutting the market, oil prices are expected to take a further plunge or continue at the current low level for a longer period. Indeed, this heralds glad tidings for Sri Lanka, whose oil import bill constitutes 25 percent of its total import bill. The lifting of sanctions will also help Sri Lanka’s exports to Iran, especially tea. Iran had been a key market for Sri Lanka’s tea. Even after the sanctions were imposed, Sri Lanka was able to export 30 million kilos a year to Iran. Now that Iran is coming out of the sanctions and getting back all its money – around US$ 100 billion – frozen in the West, the demand from Iran for Sri Lanka’s exports, especially tea, will rise. 

But the government cannot count oil tankers, dreaming of the coming windfall. Instead it should learn lessons from the sanctions episode.  One key lesson is that the policy of depending on one country for all or much of its oil imports can lead to economy-crippling consequences. 

Even now, there is little guarantee that the deal reached on Tuesday will stand the test of time, given the acrimonious Middle Eastern politics. Already, Iran’s foes such as Israel and Saudi Arabia – two of the  staunchest US allies -- have made no effort to hide their anger or disappointment over the deal. Israel’s hawkish Prime Minister Benjamin Netanyahu described the deal as a “stunning historic mistake” while pro-Israeli lawmakers in the US have also vowed to defeat it.  Saudi Arabia, meanwhile, fears an Iran freed from sanctions will have enough wealth to sustain the Syrian regime, the pro-Iranian Hezbollah militia in Lebanon and Yemen’s Houthi forces. 

For US President Barack Obama, the Vienna deal on Tuesday was indeed a signal achievement that will find him a place in the history books. When he leaves the White House in January 2017, he can look at his Nobel peace medal and feel that, after all, he deserves it because he has made peace with an enemy which had labelled the United States as the Great Satan and held 52 US diplomats hostage for 444 days at the Teheran embassy. It was also a victory for US Secretary of State John Kerry and Iranian Foreign Minister Javad Zarif. It is said that Kerry had spent more time with Zarif than with any other world figure.

Although public opinion in the US is divided over the deal, in Iran the mood was joyful, with President Hassan Rouhani saying it was an answer to the prayers of the people of Iran during Ramadan. Many analysts believe that this may be a key turnaround in relations between the two countries which find themselves on the same side as far as many global issues are concerned. They include Iraq, Afghanistan and, of course, the fight against the Islamic State in Iraq and Syria (ISIS) and al-Qaeda. Saudi officials have voiced fears that increasing contacts between Iran and the US could lead to Iran replacing Saudi Arabia as America’s main ally in the region. In the coming days, US Defence Secretary Ash Carter will travel to Saudi Arabia and other countries in the region to convince or console them that the deal does not mean that that they are being ditched in favour of Iran. 

Amidst this tough opposition from staunch US allies, a huge question mark hangs over Tuesday’s nuclear deal, according to which Iran will drastically reduce its enriched uranium stockpile and centrifuges and allow international inspection of its nuclear facilities in return for the lifting of economic sanctions. The deal is fraught with clauses that warn Iran that the sanctions could be re-imposed in case of violations. Now the interpretation of a violation of a treaty clause of this nature has more to do with politics than with the law. 

Therefore, the Sri Lankan government should work out a comprehensive strategy to avert a similar crisis in the future. The strategy should involve investing in a second refinery.  Instead of building a second international airport for ghost flights at Mattala, the then government should have spent that money on a second refinery.