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‘Oil for Projects’ among India’s options on Iran oil

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Indian officials are in Tehran exploring various options to keep paying for Iranian oil, as new U.S. sanctions threaten to derail purchases by Asia’s third-largest crude consumer.

Indian refiners currently pay Iran through a Turkish bank, but the latest U.S. sanctions may soon make that impossible, and New Delhi is looking at alternatives, including using the rupee, to settle its $12 billion annual import bill.

India relies on Iran for about 12 percent of its oil needs, but like other buyers such as Japan and South Korea, it is seeking to diversify supplies as the United States and its allies put pressure on Iran to curb a nuclear program they say is aimed at developing an atom bomb.

Iran says its goal is to produce nuclear power.

In 2010, and in response to pressure from Washington, India’s central bank scrapped a long-standing clearance mechanism, triggering a scramble by importers to find a new way to pay for Iranian crude.

Refiners started using Halkbank mid-2011, but the bank has refused to open an account for state-run Bharat Petroleum Corp to pay for oil from Iran.

Here are a few possible alternatives routes that New Delhi could consider to pay for the 350,000-400,000 barrels per day it imports from Iran.

Rupee account, higher exports

India and Iran could agree to settle trades in the rupee, and the government would allow Iran’s central bank to open an account with an Indian state-run lender, a government official said, confirming a report by the Indian Express newspaper.

The report, published last week, said such an account could be used by other countries to pay for their crude imports from Iran. India could also offer Iran the option to buy a limited amount of government bonds.

But the rupee is not the U.S. dollar.

The rupee is only partly convertible, was the worst performing major currency in Asia last year, losing about 16 percent against the dollar, and it remains volatile.

Even if both nations agreed to use the rupee, India’s exports to Iran are quite small ─ exports were worth about $2.7 billion in 2010/11 ─ which could create a funding problem for Indian banks and leave Iran holding onto wads of a currency many other countries would be unwilling to accept.

In the long-term, India may increase its exports to Iran, including funding large-scale projects in the railway infrastructure, ports, mining, automobiles, fertilizer and pharmaceuticals sectors, the Indian official said.

Payments under this so-called ‘Oil for Projects’ plan would then come out of rupee accounts held by Iran’s central bank.

One way of ring-fencing such investments from sanctions is to create consortia with Russian, Chinese and Kuwaiti companies. That way no single country or company could be singled out, the Indian Express said.

Existing Turkish conduit survives

The Indian government says the Turkish route is still working, but both sides consider it vulnerable. Its survival could depend on how much pressure Washington puts on Turkey, a Western ally, which itself is dependent on Iranian oil for about 51 percent of its needs.

Turkey and Iran have said they want to increase financial transfers and that work is underway to strengthen banking ties.

Alternative banking route

India could look at alternative banking systems, especially in Russia, a Cold War-era ally that is still New Delhi’s biggest defense equipment supplier.

Prime Minister Manmohan Singh visited Russia last month and urged Russian leaders to help find an alternative banking route to pay for Iranian oil. Two Russian financial institutions ─ VEB and Gazprombank ─ have been mentioned in Indian media reports.

While Gazprombank has officially said it has no plans to open accounts for Indian companies to settle with Iran, officials in New Delhi have insisted the Russian banks option was on the table. One Indian newspaper report has said there were efforts to open an account in South Korea’s Woori bank.

Applying for a U.S. waiver

New U.S. laws, passed on Dec. 31, allow waivers to firms in countries that significantly reduce dealings with Iran, or at any time when it is either in the U.S. national interest or necessary for energy market stability.

Indian Foreign Secretary Ranjan Mathai has said New Delhi will not ask the United States to exempt its companies from doing business with Iran.

But the government’s final decision on seeking a waiver would depend on whether India could find adequate alternatives, and refinery sources have told Reuters they have been asked to look for around for other suppliers.

The government’s argument for not seeking a waiver is that it would provide only temporary relief as the exemption would only be for 120 days, Indian officials have said.