India may next month be forced to end 18-month old arrangement of paying for Iranian crude oil imports through a Turkish bank as a new set of US sanctions against the Islamic nation comes into force from February 6.
India has been, since July 2011, using euros to clear most of its purchases of Iranian oil through Ankara-based Turkiye Halk Bankasi. As much as 55% of the $10 billion oil imports from Iran are settled through Halk Bank, while the rest of the payments are made in rupees in Kolkata- based Uco Bank.
The new US Treasury sanctions, which go into effect from February 6, bar banks from transferring Iran's oil revenues from importing nations to Tehran.
This means Iran would be forced to keep its oil revenues in local bank accounts in countries purchasing its oil. It can only use those oil earnings to purchase "permissible" services and goods, such as food, medicine and basic medical equipment, from those oil customers as imports back into the Islamic Republic.
Officials said these sanctions, if implement, would mean that National Iranian Oil Co (NIOC) will have to essentially keep all the revenue it earns from selling oil to Indian refiners in Uco or any other permitted local bank. These can be used for buying permissible goods and services.
This may sound workable but the problem is that Iran's imports from India are just one-fifth of the revenue it earns from sale of oil.
With US sanctions barring sale of any defence or technology intensive equipments, Iranian imports from India will continue to remain low. Also, New Delhi has not allowed Iranians to invest in its securities or debt.
A team of Indian officials is in Tehran since Friday to work out modalities of payments post February 6, they said adding that New Delhi has so far not sought US exemption from the sanctions.
About Rs 14,000 crore has accumulated in NIOC's Uco Bank branch and the Iranian national oil firm does not know how to use it.
If the euro payments stop and all of the payments are made in rupees, Uco account balance will swell overnight, officials said, adding that Iran is being encouraged to widen imports of wheat and other commodities.
Oil imports from Iran are slated to fall to about 14 million tons in the current financial year ending March 31, from 17.4 million tons in the preceding fiscal. This may fall drastically in the next fiscal if a solution of the payment problem is not found quickly.
Officials said the aim of February sanctions measure is for Tehran's oil revenues to become largely "shackled" within any country buying oil from Iran.
Officials said the sanctions from February mean Iran's international oil customers -- even those with State Department waivers exempting them from US Treasury penalties for purchasing Iranian oil -- will officially be at risk of being cut off from the US banking system if they allow transfers of Iran's oil revenues back to Tehran's Central Bank.
The US has pressured countries that buy oil from Iran to reduce purchases or face sanctions. India, the second-largest buyer of Iranian oil after China, was among the countries that won a reprieve last month for significantly cutting its imports from Tehran.
Sanctions have been a key part of the US strategy to force Iran to negotiate over its nuclear programme, which the United States and its allies claim is intended for producing nuclear weapons.
Tehran insists its program is peaceful, intended for medical research and meeting the energy needs of its rising population.