Indian Oil Payments To Iran: Now The Turkish Delight – Analysis

By Kandaswami Subramanian

Newspapers in India and abroad are awash with reports that India has solved its payment problems with Iran for the supply of crude oil. These problems such as supply uncertainties and payment delays have been vexing us since December last when the Reserve Bank of India (RBI) snapped the Asian Currency Union (ACU) mechanism, which provided a smooth window to ensure payments. Efforts have been on to evolve an alternative mechanism. Sadly, these have met with intractable difficulties in the context of U.S.-led Iran sanctions. This resulted in an impasse in India-Iran oil relations. These issues have been have dealt with in a separate article [i] by me. Given the complexities attached to the issues, both financial and strategic, it was not clear in which direction the government of India would move to resolve them. There are signs of new initiatives.

On 1st August, Reuters carried a report [ii] suggesting, “Iran is receiving long over due payments for its oil exports to India as two major buyers have started using a Turkish bank to get around U.S. led moves to isolate the Islamic Republic.” It detailed how Iran’s biggest Indian customer, the state-run Mangalore Refinery and Petrochemicals Ltd. (MRPL) made three payments totaling 60 million euros through Turkey’s state-controlled Halkbank. Some papers described these as test payments. A day later, Bloomberg reported [iii], “Iran has received $100 million in payment from an Indian refiner through Union Bank of India Ltd. and Istanbul based Turkiye Halk Banksi AS (HALKB).” It was relying on a report of the Press Trust of India (PTI), which cited unidentified sources.

The Iranian Oil Ministry’s website SHANA confirmed that the oil payment was resolved before any interruption in crude exports to its second biggest customer. Tehran Times [iv] also confirmed that Iran was “receiving payments for the exports through a third party bank to get around U.S. led moves to isolate the Islamic Republic.” It quoted the remarks of Iran’s Deputy Foreign Minister Seyed Amir Mansour Borghei who said, “This was a small issue and it has been resolved. There is nothing more to say.” He went on to say, “Iran would be open to multiple currency baskets for its bilateral trade with friendly countries to reduce the pressure of dollar-denominated market forces.” Further, he added, “It is a matter of careful planning, but we can explore possibilities where bilateral trade between India and Iran can be done directly in Indian rupees and Iran rials.”

Indeed, a couple of days prior to these reports, India’s Oil Minister Jaipal Reddy informed press reporters that India would be making the first payment to Iran to clear its dues. He did not give out details of the mechanism; nor indicate a time frame by which the new mechanism would be finalized. In his blog [v] Bhadrakumar gives full credit to the Minister for his personal intervention, which helped resolve the crisis. He goes on to say, “The issue had become a touchstone of India’s capacity to pursue an independent foreign policy and it is heartening that the government didn’t blink under American pressure.” Further, he expresses the hope that the ingenuity of our diplomats in the Indian Embassy in Tehran could explore new ways of cooperation with Iran. It is interesting that when the mechanism to route the payment through the EIH (an Iranian bank operating in Germany) was hit upon, Bhadrakumar viewed it as a “diplomatic feat.” [vi]. Sadly, it fell on its face within a couple of months. Will the present arrangement prove to be a Turkish delight?

Though there are several press reports, there has been no official document detailing the mechanism envisaged for payments to Iran. Broadly, the arrangement seems to be that Indian refineries such as MRPL will pay in rupees to an Indian bank. The Union Bank of India (UBI) is mentioned as the focal bank. The UBI will arrange to pay in lira to the HALKBANK in Turkey. The HALKBANK, in turn, will transfer the amount in rial to Iranian oil companies.

While this mechanism has been surmised from several press reports such as those cited in the earlier paragraphs, in the absence of any official communication from the government or the RBI, there is still an air of opacity bordering on secrecy surrounding it. Moreover, there are conflicting reports emanating from the Iranian end. For instance, in the same interview, which was cited earlier, the Iranian Deputy Foreign Minister sounded skeptical about the efficacy and durability of the solution in the long run. “It may also be possible tomorrow again some kind of another issue may crop up,” he told reporters when asked specifically if he found routing payments through a Turkish bank sustainable.

Reuters [vii] quoted Iran’s Central Bank Governor Mahmoud Bahmani who said Tehran would not need Turkish help. “Turkey does not have any role in transferring Iran’s money from India,” the semi-official Mehr news agency quoted Bahmani. He added, “Iran itself will receive its debt arrears.” In fact, he was contradicting a statement made the same day in New Deli by the Iranian Ambassador Mehdi Nabizadeh who told Mehr, “Iran and India’s officials efforts to resolve the problem led to negotiations with two or three third parties of which Turkey was one.”

In a report [viii], Bloomberg also highlighted these contradictions emanating from Iranian officials. It referred to Bahmani who rejected accounts of Turkey’s involvement and said Iran would manage to clear the debts “by itself.” However, he gave no details.

Going by these reports, there seems to be a calculated attempt to cover the arrangement under a cloud of secrecy. In the normal course, one would have expected a circular from the RBI to authorized dealers (scheduled banks) detailing the payment arrangements to be adopted by them. So far, the RBI has not issued any circular. It is therefore difficult to analyse the proposed arrangement critically. Any analysis will have to be on the basis of hypothetical assumptions.

If the idea is to have currency clearance or settlement in a trilateral format, the critical question is whether it is practicable between India, Turkey and Iran to work out one. A trilateral clearance may work well subject to certain conditions. It assumes deep and diversified trade and financial flows and relations among the members. Even if there is no balance on an annual basis, there should be the potential for growth in the near future, which would ensure longer-term balance or equilibrium. Only such a balance would ensure regular payments for all dues, including oil. Given the current levels of trade and financial flows between these partners, which are shallow and lack depth, there are serious doubts over its viability. This view is supported by data. .

India imports oil worth $12 billion annually from Iran and its exports to Iran is around $1.9 billion. Though there is scope for increasing some items of exports such as engineering, railway equipment, consultancy services, etc., it is well nigh be impossible to match the flows even over years. Moreover, countries wishing to increase their trade or economic cooperation with Iran will have to face the ire of the U.S. government and its Iran sanctions regime, which is being enforced with ferocity. Presently, Turkey is trapped in such a quandary where it is hamstrung in its efforts to deepen its economic relations with Iran. There is an undeclared war on this account.

The trade between India and Turkey reached $3 billion in 2010 and has been rising from abysmally low levels. India’s export was around $3.4 billion and imports from Turkey were about $600 million. There are bureaucratic exercises by trade missions and commissions to increase the trade and these remain on paper. Turkey is not in the radar of Indian importer. Due to the disturbed conditions in the Middle East, much of our trade has to go through Europe. Turkey’s own priorities drive her more towards the EU and the Middle Eastern markets. With its version of “look East” policy, it seeks to emerge as a political and economic power in the Middle East. Thus, its trade with India may not increase exponentially in the coming years.

The trade between Iran and Turkey is increasing and there are ambitious plans to triple it. Even so, starting from $1 billion in 2000,it had risen $5 billion in 2005 and by 2008 it hit $10 billion. In 2010 it dropped down to $5.5 billon due to global depression and fall in crude oil and natural gas prices. It has ambitious plans to deepen its relations with Iran, especially in the energy sector. The efforts have come into direct conflict with the U.S. policy relating to Iran sanctions.

Given this record of trade as detailed in the foregoing paragraphs, it will not be practicable for these three countries to generate adequate local currencies to ensure a balanced currency arrangement. They will have to seek recourse to international banking sources to settle the claims. Otherwise it will end up ultimately in blocking the accounts, as payments cannot be arranged in other convertible currencies like the U.S. dollar or the euro. This is not an exaggeration. For instance, there are reports [ix] that in its arrangement with South Korea, Iran began to receive payments in won in special accounts opened with the its central bank and, currently, a balance estimated at around $5 billion is trapped as Iran has a surplus trade with South Korea and the amount cannot be remitted in dollars. In any case, harsh economic reality is that there cannot be a trilateral balance between India, Turkey and Iran. If this assessment is in order, what is the arrangement? Does it have the approval of the U.S.?

Though an official accompanying Hillary Clinton during her recent visit to New Delhi said that officials of Treasury are working with India to find a solution, there is no further clue as to what they were working on. Nor has there been any official reaction from the U.S. Treasury or State Dept. to the current proposal.

Indeed, the idea of using third countries is not new and has been floating around for some time. When a senior Indian oil ministry official said in April that India was looking at using Turkish banks to pay for Iran crude oil, according to a report [x] in the Wall Street Journal, a U.S. official said Turkey’s commercial banks should avoid transactions with Iranian banks the U.S. has identified as conduits for financing Tehran’s nuclear program. When David S. Cohen who was on a visit to Tehran was asked about the Indian proposal, he said he was unaware of it and would not comment. However, he said in general Turkey’s cooperation with sanctions aimed at pressuring Tehran was “critical.”

It was not a casual remark. It is a part of a silent war that has been going on between the U.S. and Turkey. It may be traced back to Turkey’s approach to sanctions against Iran to prevent its nuclear program. This again has to be related to Turkey’s ‘strategic depth doctrine’ as conceived by its foreign minister Ahmet Davutoglu and elaborated by its Prime Minister Tayyip Erdogan. The new directions in foreign policy and the strategic objectives that Turkey aims to pursue in the region have come into conflict with the U.S. government.

The relations reached the lowest depths last year and were marked by a series of provocative incidents and diplomatic clashes. There are a number of scholarly studies and it is not practicable to cover all the areas. The attempt here is to confine attention to economic issues and the conflicts, which have arisen in regard to Iran sanctions. Thus, our account is rather bald and limited.

For long, Turkey was preoccupied with Europe and made its quest for European identity. It was a part of the Kemalist tradition of modernizing the country. It had strong economic ties with Europe and much of its trade was with Europe. Its investments were also from Europe. She considered herself more as a part of Europe and became a member of the NATO and other alliance formations. The foremost ambition of its leaders was to get admitted to the European Union (EU). Unfortunately, for various reasons including cultural and religious prejudices, Turkey has been made to wait at the doorstep of EU and has not been allowed to enter. By any test, it was national humiliation. After waiting for many years, Turkey had good reasons to move away.

With the coming into power by the conservative Justice and Development Party (AKP) in 2002, there has been a paradigm shift in its foreign policy. We made a reference to this earlier in this piece. It was conceived by Foreign Minister Ahmet Davutoglu as the ‘strategic depth doctrine.’ Prime Minister Tayyip Erdogan later elaborated this.

There were several elements attached to this policy. One was that Turkey would no longer consider herself as a bridge between the West and the Islamic world. Rather, it will move “East” and be a growing member of the Middle East. As one diplomat puts [xi] it, “Turkey thinks of itself as playing the role of bringing the principal actors of the region together to transform the Middle East in the same way U.S. involvement helped transform Europe from a hotbed of continental and world wars into a geography of peace.” Turkey will not believe in a policy of isolation, but could reach out to other important regional actors such as Iran and Russia to form a lose alignment. AKP’s broad regional strategy is to seek good relations and ‘no problem’ with its neighbours. Its attempt to seek closer economic relations with Iran as a neighbour has led to policy confrontation with the U.S.

Turkey was a good “cold war” ally of the U.S. Many analysts explained how it had common strategic objectives with the Western powers, especially the U.S. After his election, President Barrack Obama chose Turkey to make his first overseas visit in April 2009. In his speech to the Turkish Parliament he stated, “Turkey’s greatness lies in your ability to be at the center of things. This is not where East and West divide- this is where they come together.” He described the relations with Turkey as a “model partnership.” No wonder. The U.S. needed Turkey’s help in handling its strategic activities (including war) in Afghanistan, Iraq and Iran. Perhaps, the hegemon looked upon Turkey as a vassal or supplicant. However, as Walker explains,[xii] “At the same time, Turkey, under the leadership of Erdogan and his foreign minister, Ahmet Davutoglu, was eager to prove its importance as a rising power.”

Major differences in the relations between Turkey and the U.S. and the Western powers in general have emerged. The West distrusts Turkey’s new ideological orientation. They tend to brand them as Islamic. They fail to see it outside of the prism or groupthink, which affects approaches to anti-terrorist initiatives. They do not understand the third party role, which the AKP Party has envisioned to promote the country’s re-entry into the Middle East and to enhance its prestige. There have been divergences on several fronts and many analysts begin to wonder whether they can be bridged. The most carping attack came from Democratic Congressman Gary Ackerman who wrote[xiii] on June 15 “Turkey’s foreign policy under Foreign Minister Davutoglu’s leadership is rife with illegality, irresponsibility and hypocrisy.”

Last year witnessed a number of episodes marking the lowest point reached in U.S. Turkey diplomatic relations. In March the House Foreign Relations Subcommittee passed the Armenian Genocide Resolution. It was an unwarranted provocation and dealt with a massacre, which was related to an earlier century. It provoked Turkey so much that it recalled its Ambassador within minutes after the passing of the resolution. Then there was the Israeli raid on Gaza bound ship Mavi Marmara killing a few Turks on board. It led to Turkey withdrawing its Ambassador to Israel and led to collapse of its diplomatic relations with that country. Even earlier, the U.S. had misgivings over the shift in Turkey’s policy towards Israel. For the U.S., the most galling insult was when Turkey, as a non-permanent member of the U.N. Security Council, voted against the U.S. led Iran sanctions, the fourth round. Turkey stood by its ground even though the U.S. has been exerting intense pressure on it to cooperate in passing the resolution.

As the Wall Street Journal [xiv] reported, “Turkish Prime Minister Tayyip Erdogan balked at supporting new economic sanctions against Iran after a White House meeting with President, arguing diplomacy aimed at ending Tehran’s nuclear program needed more time.” The Turkish offered to serve as a mediator between Washington and Tehran over the nuclear question. To prove its role in the region, Turkey collaborated with Brazil to work on a fuel swap program with Iran. This convulsed the U.S. more. The proposal could not progress.

Around March 2010, closer to the time the draft resolution was to be moved, there were testy exchanges between Assistant Secretary of State Philip Gordon and Turkish officials. The U.S. was keen that Turkey must show it is “on board” with the move towards the new sanctions. He said, “Many would be disappointed if Turkey is an exception to an international consensus on dealing with Iran.” On June 9, 2010 the U.N. Security Council passed Resolution No.1929. Turkey and Brazil voted against it and Lebanon abstained. With the passing of that resolution there was the beginning of another undeclared war with U.S., i.e. over Iran sanctions.

Turkey was pursuing a pragmatic policy to promote its economic growth and its rise in the region. As captured by Marketos[xv], “… Iranian oil and gas exports to Turkey have allowed the AKP to claim an important economic victory. Turkey has tried to maintain a delicate balance between not openly contradicting U.S. policy towards Iran, and seeking to actively maintain economic and political connections with its largest and most powerful Middle East neighbor.” Another consequence was that AKP has increasingly emphasized the need for Turkey to have good relations with Iran and downplayed international concern over a nuclear Iran, “something which has frustrated Washington in its attempt to exert international pressure on Iran to give up its nuclear ambitions.” The passing of Resolution 1929 and, more importantly, the unilateral sanctions of the U.S. and the EU have upset the delicate balance and brought Turkey in direct confrontation with the U.S.

Turkish analysts and economists have been arguing that Turkey does not have to comply with bilateral and individual sanctions adopted by the U.S. and some EU member states. Bayram Sinkaya[xvi], an expert on Iran Turkey relations with a banking background, referred to the expansion pf the banking relations between the two countries and how they have increased after western governments embraced large-scale economic sanctions to constrict the Iranian banking system. While he confirmed that the Turkish banking industry was dealing with Iran’s financial institutions that are blacklisted in the U.S. and EU but not included in the U.N. Security Council Resolution that was adopted on June 12. Foreign Minister Davutoglu was more emphatic when he told Turtle Bay [xvii] in an interview that his government would continue to expand its economic relations with Iran. “Nobody can ask us to stop our economic ties with Iran,” he told Turtle Bay on the sidelines of the U.N. General Assembly debate. “We will continue to have ties because it is in our national interest.”

Turkey has continued with its efforts to increase its economic relations with Iran even after the UNSC resolution and much against U.S. pressure. On May 11, Hurriet Daily reported the signing of three agreement too boost their relations in almost all fields. Special emphasis was on the power sector. Responding to these developments, a senior U.S. official expressed unease over the cooperation and said, “We have concern about the expansion of commercial and trade relations between Turkey and Iran. We recognize that they are neighbors and there will be some commerce. That being so, as trade grows, so does the opportunity to abuse…”

Senior U.S. officials both from the Treasury and the State Department have visited Turkey and warned them repeatedly about the money trail leading to Iran to finance its nuclear plans. Treasury Deputy Secretary Cohen visiting Istanbul in May felt [xviii] that sanctions had banks in Turkey behave more cautiously but added that improvements in trade and financial ties with Iran are not getting along with the U.N. sanctions. The worry was about the relations with Bank Mellat which was in the US’ ban list. Bank Mellat had a major presence in Turkey and with its banks and financial institutions.

Within days after Cohen’s visit, Bank Mellat operating in Turkey announced that Turkish financial institutions had ceased financial interactions with it as a result of pressure from the U.S. However, the official response was not clear. Turkey is skating on thin ice in regard to sanctions. Rather, one minister said that it was for the banks to decide. The situation is rather messy or chaotic. Reuters [xix] carried a Special Report on the issue detailing several ways by which financial transactions take place between Turkey and Iran. On June 12, 2011 a secret report submitted to the U.N. Security Council was leaked and the report referred to attempts being made by Iran to circumvent UN sanctions by buying foreign banks and through exchange bureaus. Avori Jorische, a former U.S. Treasury official, who heads the Red Intelligence Group Consultancy brought out “Iran’s Dirty Banking” last year establishes a vast network of relations between Iranian and Turkish banks as also with most other countries. These read more like cloak and dagger stories that cannot be dismissed offhand.

It is likely that there has been collusion in arranging money transfers. It is possible that in the past a distinction could have been made between UNSC sanctions and the sanctions of the U.S. and EU, which are bilateral or unilateral in nature. Again, there were loopholes in enforcing them and the sanctions could be circumvented. But with the passing of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) and bringing of banking transactions within its ambit and with full executive powers, the scope for such transfers is extremely limited. If this is the political reality, what is the mechanism proposed by the government of India for oil payments?

We should end our story now. Perhaps, the intention is to exploit the growing schism between U.S. and Turkey and avail of money transfer facilities to pay Iran. As we have narrated at length, if the idea is to work out a legal trilateral mechanism, in the context of the current trade/finance relations among the three countries it will not work If it is hoped that we can exploit a temporary window offered by the messy financial situation existing between Turkey and Iran, it amounts to a gamble. At best, it may serve to put through a few or stray transactions and make them covertly. It is unrealistic to hitch our oil payments, which are regular in nature and run to billions of dollars to a system like this. It puts our energy security (oil supplies) at risk. There is the possibility of acute political embarrassment if the U.S., through its surveillance, detects the payment.. In that event, the Turkish delight may sour.

[i] Subramanian, K: India-Iran oil impasse, Paper No.4624, South Asia Analysis Group, 27 July 2011 available at http://www.southanalysis.org/papers47/paper4624.html

[ii] Reuters, Indian refiners start clearing Iran debt via Turkey, 1 August, 2011 at http://www.moneycontrol.com/India/newsarticle/news_print.php?autono=571646&sr_no=0

[iii] Bloomberg, Iran receives $100 million in Oil Payments From India, August 2, 2011, at http://www.bloomberg.com/news/print/2011-08-02/iran-receives-100million-in-oli-paymen…

[iv] Tehran Times, Iran get around U.S. led moves to block Indian oil payment, 2 August, 2011, at http://www.tehrantimes.com/index.php/economy-and-business/976-iran-get-around-us-led..

[v] Bhadrakumar, M.K.: Jaipal Reddy solves the Persian riddle, Indian Punchline, July 31, 2011, at http://blogs.rediff.com/mkbhadrakumar/2011/07/31/jaipal-reddy-solves-the-persian-riddle/?i…

[vi] Bhadrakumar, M.K.: Indian diplomacy scores ht trick, Indian Punchline at athttp://blogs.rediff.com/mkbhdarakumar/2011/02/4

[vii] Ibid. Item ii

[viii] Bloomberg, Turkey Not Helping India Settle Oil Debt to Iran, Mehr, August 1, 2011, at http://www.bloomberg.com/news/print/2011-08-01/turkey-not-helping-india-settle-oildebt-..

[ix] Iran Focus, Exclusive: Sanctions trap billions of Iran petrodollars, 3 August 3, 2011, at http://www.iranfocus.com/en/index.php?view=article &catid 31%Acconomy&id=23560…

[x] The Wall Street Journal, India Explores New Path to Iran Oil, April 28, 2011 at http://www.wsj.com/article/SB1000142405274870499704576288683752906292.html

[xi] Marketos, Thrassy N., Turkey in the Eurasian Energy Security Melting Point, The China and Eurasia Forum Quarterly, Vol.7, No.4, 2009

[xii] Walker, Joshua W., The United States and Turkey: Can They Agree to Disagree? Middle East Brief, No.46, November 2010, Crown Center for Middle East Studies, Brandeis University.

[xiii] Quoted by Walker Ibid.

[xiv] The Wall Street Journal, Turkey Balks at Iran Sanctions, December 7, 2009, at http://online.wsj.com/article/SB126021478791880453.html

[xv] Ibid. Item xi above.

[xvi] Today’s ZAMAN, Turkey not bound to bilateral EU, US sanctions on Iran, September 26, 2010 atghttp://www.todayszaman.com/newsDetail_openPrintPage.action? newsId=222690

[xvii] Foreign Policy, Turtle Bay, Turkey’s Foreign Minister: Thanks, but no thanks, on Iran sanctions, athttp://turtlebay foreignpolicy.com/posts/2010/09/23/turkey_foreign-minister-thanks-but-no..

[xviii] Hurriet Daily News, May 4, 2011, US officials speak of sanctions on lenders working with Iran, at http://www.hurrietdailynews.com/n.php?n=uas-officials-speak-of-sanctions-on-lenders-worry

[xix] Reuters, Sep 20, 2011, Special Report-Tracking Iran’s nuclear money trail to Turkey, at http://www.in.reuters.com/reports/print? Aid_INIndia-51615920100920