13 January, 2011

Indo-Iran Oil Payments

by Uddipan Mukherjee


A fresh spin was provided to the already turbulent India-Iran bilateral relations when India’s Central Bank issued a directive on December 27 2010, regarding the payment mechanism concerning trade with Iran. The Reserve Bank of India (RBI) announced that: “In view of the difficulties being experienced by importers and exporters in payments to and receipts from Iran, the extant provisions have been reviewed and it has been decided that all eligible current account transactions including trade transactions with Iran should be settled in any permitted currency outside the Asian Clearing Union (ACU) mechanism until further notice.”

ACU is the simplest form of payment arrangements whereby the participants settle payments for intra-regional transactions with the central banks as their representatives.

As an initial reaction, Iran refused to sell crude oil to the Indian companies if the payment was done outside the ACU route. Nevertheless, Iran later agreed to ensure shipments at least for January 2011.

In fact, to make matters worse, on January 07 2011, the State Bank of India (SBI) refused to issue fresh Letters of Credit (LCs) to public and private sector refiners. This move has the potentiality to ‘halt’ oil import from Iran altogether.

This particular stance by the RBI has led private sector firm Reliance to abandon its plans to invest in an oil refinery in Iran.

Though there is no direct evidence that American pressure is operating on Indian companies, however, there are indications that it is quite likely that firms like Reliance were coerced to withdraw from Iran if they wanted to keep their prospects alive in the Shale Gas sector in USA.

To partially corroborate such a hypothesis; according to WikiLeaks, the officials of the US government had warned executives of France's Total and Italy's Eni SPA that investments in Iran “could possibly impact their Shale gas investments in the US”. Moreover, the Wall Street Journal recently reported that US officials had made a similar warning to the Indian companies.

Analysts have castigated India for this move as it supposedly shows that New Delhi is kowtowing to American dictates. By all probability, the political equation is inextricably entwined with this economic decision. However, matters run deep.

The stage was definitely set up with the Strategic Partnership with USA, and further bolstered by the Indo-US Civilian Nuke deal. India’s aspiration to acquire a permanent seat in the UNSC was always serving as a backdrop. Simultaneously, America’s terming of Iran as a pariah state for its clandestine nuclear activity made diplomacy further difficult for South Block.

However, India’s position regarding the contentious issue of the Iranian nuclear programme is actually logical. India believes that since Iran is a Nuclear Non-proliferation Treaty (NPT) signatory, it needs to conform to NPT guidelines and clarify doubts, if any, to the International Atomic Energy Agency (IAEA). India never denies the fact that Iran has the right to pursue civilian nuclear energy programme.

Nonetheless, the existence of a theocracy-backed stubborn political dispensation in Tehran has not made matters smooth in this regard. In addition to that, American and Israeli misgivings regarding Iran’s motive have not created any salubrious diplomatic ambience for India either.

Needless to mention, any future sanctions against Iran would entangle India, at least tangentially because India is at present a non-permanent member of the UNSC. Over and above, offensive statements by the Ayatollah regarding Kashmir have not helped to solve matters.

Presently, India will surely try to ensure that political underpinnings do not jeopardize its own economic interests. Hence, the RBI directive may be interpreted as a temporary muscle-flexing so as to serve two purposes simultaneously: one, an indication of allegiance to US interests and two, censuring Iran for Ayatollah's Kashmir comments made in November, last year.

Hopefully, to that end, a delegation of officials from the Indian Finance and Oil Ministries and the RBI will be leaving for Tehran on January 14 to settle matters amicably. Also, on January 07 2010, Indian Foreign Secretary Nirupama Rao told that the country hopes to resolve the payments dispute with Iran before February, this year.

In that direction, India and Iran will look at currencies like the euro, yen and dirham to resolve the impasse at their forthcoming meeting in Tehran since settlement through US dollars has become difficult due to sanctions imposed against the nation-state.

Actually, India needs to perform the ‘balancing act’ between Iran and USA to a level of precision. For that, it shall be natural for New Delhi to maintain the status quo regarding the gas deals with Tehran, at least in the foreseeable future.

That means, New Delhi is most likely to procrastinate on these deals. A plausible argument posited by India is Tehran’s demand to revise the gas prices every three years for the Iran-Pakistan-India (IPI) pipeline. Furthermore, the LNG project is yet to proceed as the proposed plant would need American components, which might violate the US-Iran-Libya Sanctions Act (ILSA). Also, the direct threat posed by the terrorist groups in Pakistan is another reason for India to delay the projects.

However, it is unexpected that it would scrap the deals altogether.

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