Persian Petrol Problem

Indian refineries that import crude from Iran are running around in circles. With the third week of July over, Tehran has not intimated whether crude will be sent in August. The message: India has to find a solution to the payments crisis triggered in December by US financial sanctions.

India imports 400,000 barrels of crude from Iran a day but because no bank is prepared to handle the transactions for fear of sanctions, it has no means to pay for them. India now owes Iran $ 5 billion and the debt is rising.

There are four reasons why it is especially difficult for India to find a solution.

One is that India exports very little to Iran and imports a lot, almost all crude. So there is no way to use barter to bypass the sanctions.

Two, India’s unwillingness to make the rupee a fully convertible currency also means it must use a mutually acceptable currency. Thus the international banking system must be used, which is why the sanctions can bite. South Korea and Japan trade without hassle because they denominate it in their own currencies which are convertible.

Three, both the US and Iran are squeezing India. The former with the intent of shuttering one of the largest remaining Iranian energy markets. The latter in an attempt to get India to break the sanctions regime. How is Iran pressing us? It is not as if there are no products Iran can import from India to balance at least a part of the oil imbalance. New Delhi has identified a number of them, including automobile parts, tea, machinery and so on. But Tehran declines to let them in, presumably as part of its own brinkmanship game.

Four, prestige is involved. India does not want to appear to back down under US pressure. And it does not want to be overly dependent on Saudi Arabia, which has been moving in to replace the Iranians in the Indian and other markets. The Saudis have already killed off Reliance’s long-standing trade of refining and then re-exporting Iran’s heavy crude. But given Riyadh’s close links with Pakistan and its Wahabi ideology, India would prefer Iran to Saudi Arabia if it had a choice.

What will India do? Personally I don’t think Iran will go through with their incipient August threat. They gain nothing except a market. Their sour crude has limited international clientele because refining is so difficult.

But presume that it does, India should keep the following principles in mind.

One, Iran is a friend, but not an ally. Tehran has been helpful in Afghanistan, but a pain on issues like the Nuclear Nonproliferation Treaty and a bit of a waffle on Kashmir. India doesn’t owe Iran anything, even if it would like to remain on good terms.

Two, while US sanctions are a pain, India supports the intent of the sanctions: forcing Iran to reconsider its pursuit of nuclear weapons. Iran’s going nuke would set of a nuclear domino effect in the region, driving Saudi Arabia and Pakistan together, and otherwise making a bigger mess. India supports the strategic goal, but does not support the tactical means to accomplish it.

Three, India must avoid some of the crazier ideas being kicked around by those in New Delhi infuriated by the US sanctions. These include turning to the Chinese and using the yuan. Helping make the yuan a reserve currency without Beijing making its monetary policy market-based would be severely inimical to Indian interests. Much worse, in time, than not buying Iranian crude.

Finance is remarkably flexible, so I’m sure some accounting wizardry will come about. During Hillary Clinton’s visit, US Treasury officials said a solution was in sight. But at least this has helped India focus its mind on what global engagement is all about – making tough decisions and learning to set priorities.

Copyright © 2011 Hindustan Times.