Oil Payments to Iran - Advantage India or a lost economic opportunity

Oil Payments to Iran - Advantage India or a lost economic opportunity Author: Kapil Narula* Date: 26 Aug 14

Iran has 10 per cent of world’s proven oil reserves and it is the third largest exporter of oil in the world. Iran’s economy is heavily dependent on oil exports which comprised of approximately 80 per cent of oil based products in 2013. In order to pressurize Iran to give up its nuclear weapons program, unprecedented economic sanctions were imposed through the United Nations Security Council from 01 July 2012. As part of the sanctions, Iran was barred from using international banking channels to receive any payments. The US-led call for ban on import of Iranian oil was however not implemented by Japan, South Korea, India and China, who, only agreed to reduce their dependence on Iranian oil, over the next few years. Although a deal was worked out, which involved continuing the sale of Iranian oil to these countries, there were no international financial channels for transfer of oil payments to Iran. This money which remained as reserve fund with the importing countries was therefore not available to Iran. Iran was badly hit by these sanctions, as a result of which, it agreed to an interim deal with P5+2 (US, UK, France, China, Russia, Germany, EU) on curbing its uranium enrichment activities for a period of six-month commencing January 2014. In return, Iran was to gain access, in installments, to roughly US $ 4.2 billion of its restricted reserve funds over the next six months. Consequent to satisfactory progress made by Iran and opening up its nuclear sites for inspection, US $ 2.55 Billion was released in four installments by Japan, and one by South Korea in early July. The Asian Clearing Union, a financial clearing house, was used by India as a route to transfer payments to Iran for oil purchases. This channel was however closed in December 2010 and was followed by a new arrangement under which India paid to Iran via the Halkbank (Turkish owned state bank) in Turkey; 55 per cent of the amount was paid in Euros and the remaining 45 per cent was credited in Indian Rupees in Tehran’s account which was maintained in UCO bank headquartered in Kolkata. This money was then paid to Indian exporters in exchange of the goods exported to Iran. This mechanism worked well till 2012, but it was stopped by Turkey under US pressure. Under the new money transfer mechanism, which was evolved specifically for making the current payment, Indian Oil Marketing Companies (OMCs) deposited the amount due to Iran in Indian Rupees to Tehran’s account held with the UCO bank. The Reserve Bank of India (RBI), India’s central bank then deposited this money in an account held by UAE Central Bank in the US. The money will thereafter be transferred to Iran’s central bank in Dirhams (local currency) from where it is drawn by the Iranian companies. The RBI thereafter converts the Indian Rupees held in the UAE central bank account to US Dollars. This mechanism ensures that the financial transactions are

under the ‘eagle eye’ of the international authorities and hard currency in US $ is not available to Iran for indulging in dubious purchases from international market. Using this arrangement, an amount of US $ 1.65 billion was transferred to Iran in three installments and the final installment of US $ 550 million was released by India on 24 July 2014. Indian imports from Iran amounted to US $ 10.9 billion while its exports were US $ 2.7 billion, leading to a trade deficit of US $ 8.2 billion in 2012-13. India is the second largest destination of Iranian oil after China and approximately 10 per cent of Indian oil imports were sourced from Iran in 2010-11. Although there was a sharp reduction in Iran’s share in Indian crude oil imports in the wake of international sanctions, (which were reduced to a mere 5.8 per cent in 2013-14), both India and Iran are important trading partners. The current economic sanctions against Iran have lead to a situation where Iran is dependent on India for purchase of commodities, in return for its sale of crude oil. There is therefore a window of opportunity as India has saved approximately US $ 8 billion in foreign exchange (over the past two years) by engaging in rupee trade with Iran. This mechanism has an added advantage for Indian exporters who avoid the credit risk for the goods that they export to Iran as the money with which they are paid is already parked in the UCO Bank account. Hence this financial arrangement presents an economic opportunity to establish firm trading relations with Iran. India can utilize this opportunity to promote export of wheat, corn, rice, tea, coffee, textiles, pharmaceuticals and engineering goods to Iran and should push for further trade in Indian Rupees. Entering into bilateral trade agreements between the two countries will result in reducing the balance of payments to Iran. The Indian exporter has an advantage in this deal as the price realisation and profitability per unit is better than other conventional markets. Further, the depreciation of rupee vis-à-vis the dollar does not impact India in this kind of an arrangement. Although such an arrangement may not be acceptable to Iran, it has its back against the wall for the time being. If these sanctions are relaxed, as is on the anvil, and hard currency is amply available, Iran would prefer sourcing these products from countries of its choice. This would lead to reduced exports from India and thereby increase Iran’s trade surplus with India. International banking plays a major role in facilitating energy trade. Economic sanctions against Iran have opened a window of opportunity for India, which can look to enhance its trade in order to save precious petrodollars. India can utilize this small window of opportunity by establishing deep trading ties, with Iran which will work to its advantage, long after the international sanctions are removed. ********************************************* *The author is a Research Fellow at the National Maritime Foundation, New Delhi. The views expressed are those of the author and do not reflect the official policy or position of the Indian Navy or National Maritime Foundation. He can be reached at [email protected])