How are sanctions on Iran affecting trade with India?

By Mithuni Mehta and Amrita Mehta, Mulla & Mulla & Craigie Blunt & Caroe
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Afresh plethora of national and international sanctions have followed amendments introduced in February 2013 by the US Treasury Department to the Iran Threat Reduction and Syria Human Rights Act of 2012 to induce Iran to abandon its nuclear programme and conform with international obligations by enhancing Iran’s economic isolation.

In an additional blow to Iran, the new sanctions also seek to force countries purchasing Iranian crude oil to facilitate payment only via banks operating within their territories.

Indian scenario

From January 2009, countries in the Asian Clearing Union (ACU) – India, Pakistan, Bangladesh, Bhutan, Maldives, Nepal, Sri Lanka, Myanmar and Iran – had the option to settle their transactions in either the ACU dollar or ACU euro. Authorized dealer banks in India were permitted to open and maintain ACU dollar and ACU euro accounts with their correspondent banks in other participating countries and all eligible payments had to be settled by the banks through these accounts.

Mithuni Mehta
Mithuni Mehta

However, in December 2010, the Reserve Bank of India directed that the ACU mechanism could no longer be used to effect payment for imports of oil and gas from Iran. As a consequence of such economic sanctions against Iran, in 2011 India’s annual US$12 billion oil trade with Iran was arrested.

Sanctions imposed against Iran by the EU and US in 2012, aimed at curtailing Iran’s nuclear programme, succeeded in reducing Iran’s oil exports by half. During this period, India saw a substantial decline in its oil imports from Iran and was rewarded by way of a waiver from the global sanctions against Iran.

Over the past couple of years, with the US shutting down its financial system for Iranian crude oil trade, India and Iran arrived at an agreement whereby India would effect payment for about half of its crude purchases in Indian rupees. As a result, payment for approximately 45% of India’s Iranian oil imports was being made in rupees, kept in UCO Bank, and for the balance India routed payments in euros through banks in Turkey and Germany, providing Indian companies with a short-term avenue to trade with Iran.

The latest sanctions resulted in the closure of the latter avenue and India now must pay Iran for its oil imports entirely in rupees maintained with an Indian bank.

Further adding to Iran’s crude export woes, political pressure from the US led one of India’s largest shipping companies to cease offering to transport Iranian oil to India.

Export basket

The new sanctions mean that Indian banks holding rupee payments for Iranian oil imports are not permitted to remit such payments to Iran or elsewhere overseas, which would leave Iran no option other than to procure local Indian products from the proceeds of its crude oil sales to India. Further, restrictions have been placed on Iran in respect of the kind of goods it would be permitted to purchase from such proceeds.

Such restrictions could pose a dilemma for Iran, given that it now has over US$5 billion in rupees in UCO Bank and it cannot afford to cut its oil exports to India, which is the second largest purchaser of Iranian crude after China. Iran has been reticent about imports from India, despite India’s efforts to expand its export basket.

What’s next?

India is likely to cut its crude oil imports from Iran by 17% in the next fiscal year and is expected to continue to cut its Iranian crude imports by at least an additional 15% each year if Iran fails to reduce prices to cover the cost resulting from Western sanctions.

Amrita Mehta
Amrita Mehta

To offset the reduction in Iranian oil imports, India has turned to countries such as Saudi Arabia, Kuwait, Iraq and Azerbaijan, which have sufficient crude capacity to replace Iranian crude oil imports.

Further sanctions are expected to be rolled out in July, via the Iran Freedom and Counter-Proliferation Act, by which the US government would be entitled to impose sanctions against any entity, US or non-US, engaged in the energy, shipping or shipbuilding sectors in Iran or any such entity operating a port in Iran.

This could adversely impact India’s plan to develop the Chabahar port in Iran funded by Iranian rupee funds parked in Indian banks.

Despite the global sanctions against Iran, India recently announced that it was hoping for stronger economic and trade ties with Iran, as Iran remains an important source of crude oil for India. India will, however, have to walk a tightrope, balancing its need to maintain ties with Iran for economic reasons with its civil nuclear pact with the US and the closer cooperation sought with the US on regional security.

Mithuni Mehta and Amrita Mehta are senior solicitor associates at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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