By Robert M Cutler
India's attempts to pay for Iranian oil in rupees may not succeed easily, despite widespread press reports that such a mechanism has been established. Iran is responsible for 12% of India's imported oil and over the past two years India has struggled to find a mechanism to pay for this, its efforts complicated by United States, European Union and United Nations sanctions against Tehran.
In December 2010, the Reserve Bank of India dismantled a settlement mechanism denominated in dollars and euros that had facilitated the annual payments of US$9.5 billion for Delhi's oil imports from Tehran.
The two countries have been considering bartering commodities and other products for crude through a rupee account with India's UCO Bank (UCO), according to a Bloomberg News report last month. Later reports suggested that this mechanism might facilitate payment for as much as 45% of the oil trade between the two countries.
Iran is also very interested in agricultural exports from India, particularly soybean meal, sugar, tea, and wheat. It is also seeking to barter food supplies from Pakistan in return for fertilizer and iron ore, and at the same time it wants to buy Indian steel.
However, a detailed commentary in Economic Times of India notes a number of obstacles to the proposed mechanism, not least that UCO's Iranian partner, Parsian Bank, requires a minimum 120% margin deposit from importers, that is, "worse than a cash deal", one so "nebulous" that UCO "cannot negotiate shipping documents" and "is limited [to] forwarding documents" to Parsian Bank and the Iranian oil ministry, which alone can authorize payments.
"Indian exporters", the anonymous (that is, approved at the newspaper's high editorial levels) commentator concludes, "are at the mercy of [the] Iranian side to 'hope' for payments".
In addition to that, UCO may be "de-SWIFTed". (SWIFT is the Society for Worldwide Interbank Financial Telecommunication, which expelled Iran's central bank and more than 20 other Iranian banks last month, making it nearly impossible to complete large international funds transfers.) The article also details several other technical problems that interfere even with the Tehran-Dubai settlement mechanisms. These include but are not limited to problems of shipping insurance, currency depreciation, and dispute resolution. 
In a separate article Economic Times notes, and is not alone to do so, that one of the in-kind manners in which India can pay for Iranian oil is by contributing to the so-called International North-South Corridor project, earlier known as the North-South Transport Corridor, a prospective multi-modal transportation network that has been envisioned from India to Russia via Iran.
This corridor is not a new idea; India, Iran, and Russia signed a framework agreement as long ago as 2001. However, India has lately catalyzed new interest in the project first by promoting a January meeting with Bulgaria, Iran, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan, and second by sending a team to Iran that is said to have identified the rail links there that would be in need of refurbishment or reconstruction.
In addition to the just-named countries, the project reportedly also includes Armenia, Azerbaijan, Belarus, Oman, Turkey, and Ukraine. A further organizational meeting was reportedly planned in India for the end of last month.
India wants a rail route to Russia (whence perhaps even Europe) and Central Asia, but the Himalayas block the route northwards, even assuming China would permit such a project. The absence of Afghanistan from the project is noteworthy in light of the mineral and other raw materials resources that have recently been inventoried there, but the project organizers judge Afghanistan and Pakistan to be just too unstable.
According to one report, the prospective route would connect ports on India's west coast to Iran's Bandar Abbas on the Strait of Hormuz, whence heading northward overland to its Caspian Sea port of Bandar Anzali port on the Caspian Sea; onwards to Rasht and Astara on the border of Azerbaijan; from there both eastward, presumably across the sea to Kazakhstan, and northwards to Russia. No authoritative public announcement has been made.
At the same time, the Central Asian countries and Kazakhstan in particular have been seeking an Indian balance against geo-economic encroachment by China and Russia. India has no direct route to these countries, which are potential markets for Indian producer and consumer goods.
The logistical capabilities for trans-Caspian expedition of large-scale container ships are, however, far from clear. Given the evident lack of interest in the project on the part of Turkmenistan and Uzbekistan, Indian goods might have to reach Central Asia through Russia.
Iran is buying Chinese-made washing machines, refrigerators, electronics, and other personal and consumer goods with yuan paid into Chinese bank accounts, according to Kenneth Katzman of the Washington-based Congressional Research Service, quoted by Bloomberg News.
Iran had earlier announced that it would accept payment for oil in gold from any third country, without suggesting how transportation or insurance issues would be addressed.
1. "Why there is a need to rework Indo-Iran rupee trade", Economic Times, March 31, 2012.
By ZIO Antoine Blua...
Over the years, international sanctions have been imposed on Iran that squeeze the country's vital oil exports and government finances in an effort to force Tehran abandon its nuclear program. RFE/RL correspondent Antoine Blua asked Shashank Joshi, a research fellow at the defense and security think tank Royal United Services Institute in London, how those sanctions are affecting Iran's trade.
RFE/RL: During a visit to Tajikistan this week, US Assistant Secretary for South and Central Asia Robert Blake called on countries in the region to support US sanctions and "avoid trade and other transactions" with Tehran in order to help the international community shutter Iran's nuclear program. If a country signs up to US sanctions, what would not be allowed in terms of trade?
Shaslank Joshi: The principle sanctions and embargoes are targeted specifically at the Iranian oil sector, and they're designed to stop payment mechanisms so that countries that wish to trade with Iran have trouble purchasing or paying for the oil they have agreed to purchase.
Specifically, any financial entity, any bank, that tries to assist paying for Iranian oil can be sanctioned by the United States - which means that if it does any business with the Iranian Central Bank, it can't do business in the United States. And because the United States is such a dominant economic market for most countries in the world, that's a major punishment.
It isn't so much the case that countries are signing up to sanctions. If they don't agree to sanctions or comply, whether or not they sign up or don't sign up, they will find themselves in trouble with the United States and potentially sanctioned by its financial institutions.
RFE/RL: In January, the European Union placed an immediate ban on all new contracts to import, purchase, or transport Iranian crude oil and petroleum products. EU countries with existing contracts to buy oil and petroleum products can, however, honor them until July 1. What is the expected impact of this ban, given that other countries will continue to buy Iranian crude oil and petroleum products?
Joshi: No one is hoping to completely cut off Iranian oil. I think most countries in Europe and the United States recognize that's impossible. The objective is: by cutting the number of buyers of Iranian oil, it forces the Iranians to sell the surplus, to sell what's left, at a discount to countries like China who are still buying it. That means overall there's going to be less revenue for Iran.
There's already evidence that the sanctions have cost Iran billions of dollars - not because it can't get rid of its oil, although that is a problem and it has to store some of its oil offshore - but also because the oil that it does sell is cheaper. China knows Iran has fewer buyers; it can therefore negotiate a better deal on better terms.
RFE/RL: Embargoes imposed by the United Nations Security Council cover arms, sensitive nuclear materials, or goods that could be use in the development of missiles. Iran, however, can trade all sorts of goods, including agricultural products. The country, for instance, has bought wheat from the United States, Russia, and Kazakhstan in recent months in an effort to build up its food stores.
Joshi: Yes, it can import a number of products, but the obstacle to that is also practical. For example, the Iranian currency has fallen 55% against the dollar - I think - over the past couple of months alone. And that means that imports for Iranians are extremely expensive, even if they are legal. In a number of other ways, actually, doing business with Iran is more and more difficult. Even if you buy a good that you're allowed to technically purchase, you may find that actually paying for suppliers - if you're a businessman inside Iran - that may become prohibitorily difficult.
RFE/RL: And that's because since earlier this year, some 30 Iranian banks, including the Central Bank, have been refused access to SWIFT, a worldwide financial messaging system that's used to arrange transfers of money?
Joshi: Being cut off by SWIFT means that if you're a small business and you make clothes and you import cloth from Azerbaijan, you might find that you have orders for the next two years that cost you US$1 million-$2 million but that no bank in Iran is able to secure the necessary credit inside [Azerbaijan] to pay your suppliers, or that no financial institution inside Azerbaijan or anywhere else is willing to handle the payment and willing to transfer that amount of money and therefore take the risk of running afoul of US sanctions or running the danger of losing its money because the channel is cut off.
So it means that those businesses who were practicing perfectly legal business between Iran and its neighbors find that they just don't have access to the financial institutions to transfer money to their suppliers.
RFE/RL: This would explain why Kazakh wheat sellers, for instance, would demand Iranians' payment in advance in cash?
Joshi: Suppliers aren't willing to take the risk. Whereas previously they may have made deals that they would supply a month worth of goods and payment would come at the end of the month, their concern is that at the end of the month there may be absolutely no point of contact between Iran and Kazakhstan. There may be no legal mechanism, and so they will only undertake those transactions if they have the money in advance.
The environment of transactions is so uncertain, so volatile, so fragile, that no one really knows what routes and avenues there will be to keep paying suppliers or to keep transferring money. And so why would anyone take the risk of extending credit to those inside Iran who may be cut off suddenly?
RFE/RL: What are the ways to get around the sanctions?
Joshi: The most obvious way is to simply smuggle goods. There's certainly evidence that smugglers and smuggling networks have profited from these sanctions. One of the problems in Iran is that smuggling networks are often controlled by the Iranian [Islamic] Revolutionary Guards Corps, the IRGC, which is the elite revolutionary armed forces of Iran.
There are other ways, of course, as well. For instance, India and Iran had previously agreed to trade some of their oil in a barter system, so that India would give nonoil products to Iran, including wheat, and Iran would in turn give India oil. There are also some small banks that may be willing to defy sanctions, that may calculate actually that is a risk worth taking - to handle the transaction. There are certainly some small banks in some places like Russia, for example, that would be willing to handle payments across borders in this way.
RFE/RL: By saying smugglers, you mean people carrying from places to places suitcases full of bills or gold?
Joshi: At the crudest level, yes. We would refer to the direct land route between Iran and Turkey on its large and porous border, yes. And those networks are often controlled by corrupt members of the establishment or the state. So, it's fairly possible that you only have to bribe some border guards in Turkey and Iran to get your shipment across and to get your money across without having to operate through a recognized bank and without having to operate through any institution that has a legal existence and paperwork.
RFE/RL: Are these actions to get around the sanction illegal?
Joshi: Many or some of them will be straightforwardly illegal. But let's remember here, these sanctions we're seeing, they're of two different types: There are Security Council sanctions that are technically binding on all UN member states; for example, anyone who supplies weapons to Iran is in violation of international law. However, there are other sanctions that are simply American laws or European laws that cannot be binding on other states. So the short answer is: Many of these actions are not illegal.
RFE/RL: How has the United States retained some flexibility in how it imposes the sanctions?
Joshi: President [Barack] Obama has something called a National Security Waiver, which means if any country decides to defy the sanctions and keep working with the Iranian Central Bank, he can hold off from punishing them if he thing to do so would be detrimental to national security. And he's already granted waivers to countries like South Korea and Japan. Now, a lot of people think that he wouldn't really pressure and sanction big countries like India and China because to do so would be too damaging. So that's also going to be one continued way for Iran to evade or at least alleviate the impact of sanctions.
RFE/RL: Finally, to what extent are sanctions hurting Iran?
Joshi: Although the sanctions are leaky, they are still having a major effect. If you look at Turkey's exports to Iran, which have been going up and up and up for 10, 12, or 15 years, they fell by 25% over the last year. The currency has absolutely collapsed and - forget about businesses - ordinary people are finding difficult to make payment abroad. Imagine if your credit card just stopped working outside your country.
These are major problems for Iran [and] they are making some people in Iran think: is the nuclear program worth it; is the science worth it for all this economic pain? Now, I think the fine balance has to be struck here [because] if the sanctions get too tight and they cause severe humanitarian hardship, well, it could well backfire on the utterly corrupt and criminal/Zioconned West....