India’s dilemma: How to pay for Iranian oil
By Vijay Prashad
An explosion on Aurangzeb Road in New Delhi damaged an Israeli embassy car, and injured its occupants.Tal Yehoshua Koren, the wife of the defense attache at the Israeli embassy was seriously wounded. She is in critical care. She was on her way to pick up her children from their school. It is unusual for a diplomatic vehicle to be attacked on the streets of New Delhi. The Delhi police went into action. The international media wanted to know who had done the attack minutes after it was reported.
The police was wary. Let us conduct our investigation, they said. Israeli Prime Minister Benjamin Netanyahu went before his parliament and accused Iran of a terrorist act. “The elements behind these attacks were Iran and its protege, Hezbollah.” Iran, he said, is “the largest terror exporter in the world” and Israel “would act with a strong hand.” This was all the confirmation that
BBC needed. It began to report the attack as an Iranian act against an Israeli diplomat on Indian soil.
Why would Iran conduct an attack on an Israeli diplomat in India, particularly as India is in the midst of trying to negotiate a delicate arrangement with Tehran to pay for Iranian oil? The question mystifies.
Iran is responsible for 12% of India’s imported oil (see my India pivots, and pivots again, Asia Times, February 9, 2012). Over the past two years India has struggled to find a mechanism to pay Iran for this oil. Sanctions by the United States and the European Union as well as by the United Nations Security Council against Iran have complicated the market for Iranian oil. Until 2010, India used the facilities offered by the Asian Clearing Union (ACU), founded in 1974 as an outgrowth of the United Nations Economic and Social Commission for Asia and the Pacific.
To help countries economize on their foreign exchange reserves, the ACU allowed them to conduct bilateral barter and make payments using the Asian Monetary Units (currency units indexed to the US dollar and the euro that allowed countries to hold surpluses and deficits outside their formal foreign exchange reserves). In December 2010, under pressure from the US Treasury, the Indian government withdrew from the ACU facility (a Reserve Bank of India circular from December 27 noted that “all eligible current account transactions including trade transactions with Iran should be settled in any permitted currency outside the ACU mechanism”).
The Indian government then turned between February to April 2011 to a complex mechanism using the Hamburg-based Europaisch-Iranische Handels Bank (EIH) via the German Central Bank and the State Bank of India. The procedure did not violate UN security council or European Union sanctions. With the end use for payments certificate provided by the State Bank of India, the US Treasury should have ben satisfied – the money was going toward payments for crude and not to facilitate Iran’s nuclear program.
Nonetheless, pressure on German Chancellor Angela Merkel from the US mounted. “Treasury is concerned about recent reports that the German government authorized the use of EIH as a conduit for India’s oil payments to Iran,” the US government noted. “Treasury will continue to engage with both German and Indian authorities about this situation and will continue to work with all the allies to isolate EIH.” On April 4, 2011, the US Treasury got its way. Germany broke the India-Iran link.
India then conjured up an arrangement with Turkey’s Halkbank. Turkey, with deep economic ties with Iran, has abided by the 2010 security council restrictions but has refused the deeper US and European Union sanctions regime. The Turkish government owns a 75% stake in Halkbank, and has allowed it to be the conduit for countries like India to pay for Iranian oil. Mehmet Ozkan, who teaches international relations at the International University of Sarajevo, told me that Turkey is trying to develop an “independent line,” following the UN sanctions but keeping itself apart from the harsher US and European Union sanctions.
Over the past year, US Treasury officials have visited Turkey to try and cut Turkey’s links to Iran. Obama’s December 31 tighter sanctions made it illegal for American firms to do business with those firms that dealt with Iran’s Central Bank. Halkbank is relatively immune from the US financial system, and it is the main financial intermediary for the Turkish refiner Tupras. Nonetheless, as E Ahmet Tonak who teaches political economy at Istanbul Bilgi University told me, Halkbank had to accede to the strong US pressure, particularly after a US Treasury team visited Turkey in the past few weeks.
Indian and Iranian officials have been in dialogue over the past two weeks to circumvent the embargo of Iran’s financial system. India does not have the flexibility of China, whose economic power gives it genuine independence. China pays for Iranian oil with the yuan, which it is trying to put forward as an international trading currency. India does not have that freedom.
In early February, the Indians and Iranians created a payments mechanism: India would pay 45% of its oil bill with rupees which would be held in the Kolkata-based UCO bank and paid out to two Iranian private banks, Bank Parsian and Karafarin Bank. The rest of the oil bill will be sorted out in time.
India hopes to use these rupees to boost exports from India to Iran. Currently trade between India and Iran is uneven, with only US$ 2.74 billion as Indian exports in a total trade bill of $13.6 billion. To boost the Indian exports, the government plans to send a delegation to Iran in the next few months. “A huge delegation will be going,” said Commerce Secretary Rahul Khullar. Anup Pujari, Director-General Foreign Trade (DGFT), Union Ministry of Commerce, pledged to a gathering in Mangalore that this delegation was going to strike a deal.
The exporters should continue booking business with their Iranian counterparts. India wishes to export wheat and rice, tea, pharmaceuticals, iron and steel. The US has said that it would not sanction “food, medicine, medical devices. So from our perspective,” US State Department spokesperson Victoria Nuland said, “this kind of trade would not be sanctioned.” Or at least one should say, it will not be sanctioned for now. There was also talk that India could barter wheat for oil, but the country’s Food Minister K V Thomas has not yet seen a formal proposal.
The stumbling block this week was over the payment mechanism. By Indian law, if Iran receives payment in rupees inside India it will have to pay a 40% withholding tax. The Indian government is under pressure from the refiners in India to forgive this tax. “Most likely the National Iranian Oil Company would not want to pay this high tax,” said B Mukherjee, a director of the Hindustan Petroleum Corporation. “We clearly do not want to pay the tax as it will make our imports costlier. I might as well buy oil from somewhere else if this 40% stake is saddled on me.”
In a major speech at the Center for Strategic and International Studies in Washington on February 6,India’s Foreign Secretary Ranjan Mathai noted, “Iran is our near neighbor, our only surface access to Central Asia and Afghanistan, and constitutes a declining but still a significant share of our oil imports. For us, there are also broader and long-term geostrategic concerns that are no different from what we face elsewhere in the Asia-Pacific region. Our relationship with Iran is neither inconsistent with our non-proliferation objectives, nor is it in contradiction with the relationships that we have with our friends in West Asia or with the United States and Europe.”
The US sees these trade relations as deeply troubling. The US is eager to make the Iranian sanctions a test of friendship with its allies. US State Department spokesperson Nuland said last week, “We are working with countries around the world, including India, that maintain strong oil relationships with Iran, encouraging all of them to reduce their dependence on Iranian crude.”
The India-Iran deal is near completion. How the attack on the Israeli embassy car in New Delhi will impact on this is anyone’s guess. Parochial political agendas once more threaten to interrupt a very important quest, which is to create trust and interdependence across the Asian continent and defuse any tensions that might lead to war. The sanctions regime is a fool’s paradise, undermining the fuel paradise that Iran and India have sought to construct.