RBI directive likely to fuel oil crisis - Atasi Das

An imminent oil crisis stares India in the face after a December 2010 Reserve Bank of India (RBI) directive stopped facilitating payments for crude oil imports from Iran, under the Asian Clearing Union (ACU) framework. Iranian oil imports cater to around 12 per cent of the Indian crude oil requirements. Following the RBI order, payments for goods imported from Iran cannot be made either in dollar or the Euro. Indian importers have been left to deal directly with the Iranian entities, barring any association of either the Indian or the Iranian central bank, thus necessitating the need for a substitute panel of banks for routing the payments. India’s current dues to Iran are worth one billion Euro; the import payments for oil and gas from Iran may now be settled in any “permitted currency” outside the existent ACU framework.

The RBI move would bar India from importing the contracted 10 million barrels of crude from Iran for the month of January 2011. It will not be easy to make up this shortfall. Oil industry officials have rued the RBI decision to suddenly do away with a system that had been working smoothly since 1976, without putting into force any alternative arrangement. The crisis is likely to push up the already firm crude oil prices. The American and European “clearing houses” have reportedly refused to process payments related to the Iranian oil and gas sector.

The payment settlement problems have made crude oil import by state run oil companies like ONGC and IOC difficult. Their nationalized bankers like the State Bank of India, Punjab National Bank and the Indian Overseas Bank are yet to figure out a solution to this problem. As per a 4 January 2011 news-report, an interim arrangement has ultimately been reached, by which India’s payment for Iranian crude for the month of January 2011 will be routed through a Hamburg based German bank

Analysis
The Tehran based Asian Clearing Union (ACU) was established in December 1974-it provides a framework for clearing payments among members on a “multilateral basis”; imports by the nine countries are settled on a bi-monthly basis. Participant central banks are those of India, Bangladesh, Maldives, Myanmar, Iran, Pakistan, Bhutan, Nepal and Sri Lanka. Till 2008, ACU payments were made in USD, which was later changed to the Euro in view of the US sanctions against Iran over its nuclear programme.

Recently the European Central Bank (ECB) has asked for certifications from the ACU central banks, including RBI, stating that the Euro is not being used for importing commodities that are under US sanctions. Instead of providing the requisite crude oil import certifications, the RBI has simply dismantled the ACU payment clearing system.

India imported 21.3 million tons of Iranian crude oil in 2009-10, and is slated to be around 18 million tons in 2010-11. The projected fall in imports in some extent can be accounted to the leading Indian refiner Reliance Industries, which has scrapped plans for investment in an oil refinery in Iran, as it is unwilling to affect its chances in the US shale gas exploitation market. Reliance was an important Iranian customer as it was also a leading supplier of refined petroleum to Iran. The other leading Indian importers of Iranian crude oil are Mangalore Refinery and Petrochemicals Ltd (MRPL) with 7.1 million tons of contracted oil imports, Mumbai based Essar Oil, Indian Oil Corp and Hindustan Petroleum Corp with yearly import figures of 5.5 million tons, 3.5 million tons and 3 million tons respectively.

The United States wants to economically isolate Iran as a means of pressurizing the country over its nuclear aspirations. Egged on by the US pressure, leading trade partners of Iran like China, Japan and India have slashed import of Iranian crude in recent times. India is also keen to toe a similar line in the arena of international politics- she has voted against Iran at the International Atomic Energy Agency, while Iran has supported the insurgency bid in Indian Kashmir.

The US has backed India’s bid for a permanent membership in the expanded UN Security Council and has praised RBI for its latest embargo. The US is also likely to use its Saudi Arabian connections for arranging alternative sources of oil supply for Iran’s Asian customers, once they toe the US line. Ratings agency ICRA has clarified on 3 Jan 2011 that credit profile of downstream oil companies rated by ICRA will not be immediately affected by the RBI move.

Conclusion
Iran is a leading oil producer and the only oil exporter in the AUC group-India is the biggest oil importer in the bloc. Analysts are worried that credit hurdles imposed on the back of US led sanctions may affect India’s trade relations with Iran. Since the ACU operations fall outside the ambit of the U.S. Treasury led extra-territorial sanctions Washington has reportedly pressurized Delhi to directly wall this trade route. Government sources have reportedly clarified that companies with an investment of over $20 million in Iran will be barred from business deals with the U.S. and EU based companies. The recently concluded Indo-Iran Joint Working Group meeting in Teheran on means of advancing cooperation between the leading hydrocarbon enterprises of both countries, in the backdrop of the sanctions regime was inconclusive.

India purchases over 400,000 barrels of crude daily from Iran. If the imbroglio continues Indian refiners will need to zero in on alternative oil sources, a task made difficult by the fact that international crude prices are at a two-year high and India is in the throes of chronic high inflation, which stood at 9.7 percent in October 2010. To conclude, the oil impasse continues as international politics dictate regional trading norms-it remains to be seen as to how India balances her trade relations with neighboring Iran on mutually beneficial terms.