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India Faces Fresh Hurdles in Paying For Iranian Crude Oil Imports

A laborer works amid oil containers at a wholesale fuel market in Kolkata, India, April 7, 2011

A laborer works amid oil containers at a wholesale fuel market in Kolkata, India, April 7, 2011

India is facing new difficulties paying for crude oil imports from Iran. In New Delhi, international sanctions against Tehran's controversial nuclear program are at the heart of India's payment troubles.

The problems in disbursing money to Iran for oil shipments first surfaced in December, when India’s Central Bank stopped payments through a regional financial clearing house that the United States says is used by Tehran to avoid international sanctions.

Indian companies, which obtain significant oil supplies from Iran, then began routing money to Tehran through the European Iranian Trade Bank, based in Germany.

But this arrangement was also scrapped this week because the United States believes the bank supports Iranian firms involved in the country's suspected nuclear weapons program.

India is again in talks with Tehran to find a way to route payments without defying international sanctions.

A former energy adviser to the Confederation of Indian Industry, V. Raghuraman, says the crude oil that comes from Iran is vital for India.

"From Iran, we are getting about 15 per cent of the crude, which we get as imports. Definitely it makes a good portion of our basket. So, the next three to six months are going to be quite a challenge for India," Raghuraman states.

Indian officials say they may explore the option of making payments in yen through a Japanese bank. Indian Foreign Secretary Nirupama Rao, who is currently visiting Tokyo, is expected to discuss the issue with Japanese officials.

Energy experts also say that in the long run, India will have to consider alternative sources. But they say that may not be easy because of the political turmoil in some oil-producing Middle East countries, such as Libya.

Raghuraman says it may turn out to be more expensive for India to import from other countries. He says New Delhi, which has good relations with Tehran, would also like to retain some imports from Iran.

"Maybe that we have to pay a big price for it, but surely we’ll diversify. Probably we will try to access crude from Russia, as well as from Saudi Arabia, Nigeria etc, but that will take time. But I don’t think the Iranian thing can be wished away because we have other economic relationships with Iran, and definitely outside the sanctions whatever is possible we would like to see that that is tapped," Raghuraman said.

Iran is India's second largest crude oil supplier, with annual imports worth $12 billion. Last week, the government in New Delhi said it is complying with U.N. sanctions by banning all trade in goods and technology that could help Tehran’s nuclear weapons program.

Although traditionally friendly with Iran, New Delhi is trying to seek a balance that will not hamper its ties with the United States or impact its emergence as a larger player on the global scene.