The Tehran regime has been remarkably patient. And silent. The government appears to be censoring news of the payment problem so as not to inflame public passions and prompt calls to shut down oil deliveries to India.
The Islamic Republic has had problems selling all its oil in the last year, as more and more oil firms stop dealing with Iran because of the banking complications caused by the US Treasury. Iran has frequently had quantities of oil stored in floating tankers as it has hunted for buyers. The silence on India may be because it is fearful of losing a very major market. India buys one-sixth of all of Iran’s crude exports.
While the payment problem is grounded in the US Treasury’s banking rules, the problem was actually started last December by India’s own central bank, called the Reserve Bank of India (RBI).
India and Iran are both members of the Asian Clearing Union, a banking system that simplifies payments of trade debts among six South Asian states. At the end of each quarter, the Asian Clearing House totals up how much Iran sold to India and how much India sold to Iran and then bills India for the net difference. (Since India buys much oil from Iran, it always owes Iran, not the other way around.) The RBI then makes the payment to Iran.
US banking rules require that foreign banks dealing in the United States must follow practices that guarantee they are doing nothing to help Iran’s nuclear or missile programs. The problem with the Asian Clearing Union procedures is that it simply tells the RBI what net amount to pay. The RBI doesn’t know if that payment covers oil or nuclear reactor equipment.
In December, the RBI realized it could have serious problems with the US Treasury. (It isn’t known if the US Treasury told the RBI it was about to have serious problems!) The RBI then announced it would cease to make any payments to Iran under the Asian Clearing Union procedures.
That set off a helter-skelter search for an alternative payment mechanism.
India also feared losing Iranian oil supplies. But the Islamic Republic swiftly notified New Delhi that it trusted India and would continue to supply crude oil to India in the weeks it would take to set up a new payment mechanism. Those weeks now exceed four months.
That time demonstrates graphically just how great a throttlehold the United States exercises over the international banking system. The Americans do not and cannot bar any non-Americans from financial dealings with Iran. But so much of the world’s financial transactions involve the United States that the US Treasury can throw up all sorts of bureaucratic hurdles to the point that it simply isn’t worth the trouble for others—meaning chiefly large international banks—to bother with the relatively small Iranian market.
In its simplest form, what the US Treasury has said with its regulations is: You can deal with Iran or you can deal with the United States, but not both; take your pick. For big banks, that is not even a debatable choice.
Indians are flabbergasted at the complexity of the banking problems they now face. India has searched hither and yon for an alternative payment route.
India buys an average of about $1 billion worth of crude from Iran each month. That means it has received about $4 billion worth of crude since the RBI shut off the old payment mechanism December 27.
It actually didn’t take long for India to find a new payment mechanism—an Iranian-German bank based in Hamburg and named the Europaeisch Iranische Handelsbank (European-Iranian Trade Bank) (EIH), which was set up long before the revolution by Iranians seeking to promote Iran-German trade.
The bank was put on the US blacklist last September for helping Iran’s nuclear program. But it is not on the EU blacklist. Britain and France have urged that the bank be blacklisted. But Germany has firmly opposed that step. Most large German firms, with substantial business in the United States, have abandoned their operations in Iran so as not to endanger their much larger market in the United States. But medium-sized German firms have exploited that trend by moving into the Iranian market. Those medium-sized businesses are the backbone of the ruling Christian Democratic Union party in Germany and they need the EIH to handle their financial transactions with Iran.
But the German newsmag-azine Der Spiegel reported that Iran pressured Germany to agree to the EIH payment route for India. Der Spiegel said it was part of a deal made in February that brought the release of two German reporters arrested in Tabriz while interviewing the son of Sakineh Mohammadi-Ashtiani, the woman sentenced to be stoned for adultery.
With that German decision, the United States descended in full force on Berlin, insisting that EIH be sanctioned. Germany said there was not sufficient evidence of the bank’s links to Iran’s nuclear program and any blacklisting would not survive a court challenge by the bank. But Britain has now dumped a stack of evidence at the door of German Chancellor Angela Merkel, the German daily Suddeutsche Zeitung reported last month, and Germany has now dropped its objection to blacklisting the EIH.
According to German and Indian press reports, India made payment of $2.1 billion to Iran through EIH before the payment mechanism was shut down. That means that, as of now, Iran is carrying about $2 billion in Indian debt, with the amount rising daily.
With the German route closed, India is now looking elsewhere. Last week, Reuters quoted an Indian Oil Ministry source as saying India was looking at ways to make the payments through Turkey, which has been moving closer to Iran in business and political terms over the past year.
A former energy adviser to the Confederation of Indian Industry, V. Raghuraman, said India might diversify and buy more oil from other countries, but he argued it would not be a good idea to cease all purchases from Iran, which would still require a payment mechanism.
The Telegraph of India says Iranian and Indian officials are also looking at the option of paying for Iranian crude with Indian rupees. The problem with that simple solution is that Iran buys very little from India. What would Iran do with mile-high stacks of rupees? Presumably, it would have to reduce its purchases of consumer and capital goods elsewhere and buy much, much more from India.
The Telegraph said the RBI had vetoed this procedure for months because it would mean so much Indian wealth would end up in Iranian hands. While India bought $12 billion worth of Iranian products (almost entirely oil) last year, it sold only about $1 billion worth of Indian products to Iran. But The Telegraph said the RBI is now rethinking that, surmising that such a payment mechanism would force Iran to buy more Indian products and open a vast new market for Indian firms.
And if Iran doesn’t spend all its rupees, that would reduce the money supply within India and act as a damper on inflation, some are arguing, the newspaper said.
During the four months since the RBI payment route was blocked, Iranian officials have proclaimed numerous times that a solution had been found and that payments had resumed. Those comments appeared aimed at quieting critics within Iran who are fearful that India will stick Iran with the tab. None of the announcements of solutions from Iran have been correct. But no one who knows India believes that it is engaged in some kind of legerdemain to shaft Iran on oil payments.
The other countries within the Asian Clearing Union are Bangladesh, Pakistan, Sri Lanka and Myanmar.