The Oil Payments: New Twist in India-Iran Relations

By Uddipan Mukherjee

A fresh spin was provided to the turbulent India-Iran bilateral relations when India’s Central Bank issued a directive on December 27 2010, regarding the payment mechanism for 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 participants settle payments for intra-regional transactions with central banks as their representatives. Iran had refused to sell crude oil to 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 7 January 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 potential to ‘halt’ oil import from Iran altogether.
This stance by the RBI has led Reliance Industries 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 this 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 issued a similar warning to the Indian companies.

Analysts have castigated India for this move as it shows New Delhi kowtowing to American dictates. In all probability, the political equation is inextricably entwined with this economic decision. The stage was definitely set by India’s Strategic Partnership with the US, further bolstered by the Indo-US Civilian Nuclear deal. India’s aspiration to acquire a permanent seat in the UNSC was always providing the backdrop. Simultaneously, America’s terming of Iran as a pariah state for its clandestine nuclear activity made diplomacy 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 Nonproliferation Treaty (NPT) signatory, it needs to conform to NPT guidelines and clarify doubts, if any, raised by the International Atomic Energy Agency (IAEA). India has never denied that Iran has the right to pursue its civilian nuclear energy programme. Nonetheless, the existence of a theocracy-backed political dispensation in Tehran has not made matters easier. In addition, American and Israeli misgivings regarding Iran’s motives have further muddied the diplomatic ambience for India.

Needless to mention, any future sanctions against Iran would entangle India, at least tangentially, because India is now a non-permanent member of the UNSC. Besides, offensive statements by the Ayatollah regarding Kashmir have not helped. India will try to ensure that political factors do not undermine its own economic interests. Hence, the RBI directive may be interpreted as temporary muscle-flexing to serve two purposes: one, an indication of accepting US interests, and two, censuring Iran for the Ayatollah’s Kashmir comments made in November last year.

A delegation of officials from the Indian Finance and Oil Ministries and the RBI will be leaving for Tehran on 14 January to, hopefully, settle matters amicably. Further, on 7 January 2010, the Foreign Secretary, Nirupama Rao, had said that the country hopes to resolve the payments dispute with Iran before February this year. India and Iran may therefore examine 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.

India needs to perform a difficult ‘balancing act’ between Iran and the US. New Delhi would like to maintain the status quo regarding gas deals with Tehran 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 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 terrorist groups in Pakistan is another reason for India to delay the projects. However, it would prefer to not like to scrap the deals.

Uddipan Mukherjee
Assistant Professor, Kolkata
email: [email protected]