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.
Vijay Prashad is
Professor and Director of International Studies at
Trinity College, Hartford, United States. This
spring he will publish two books: Arab Spring,
Libyan Winter (AK Press) and Uncle Swami:
South Asians in America Today (New Press). He
is the author of Darker Nations: A People's
History of the Third World (New Press), which
won the 2009 Muzaffar Ahmed Book Prize.
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