India to Pay in Rupees for Iranian Oil After US Sanctions Block Use of US Dollars

New Delhi, Sep 20: India may revert to paying  for the oil it buys from its third largest supplier as US sanctions will from November 4 block use of US dollars to settle such trades, a top official said Thursday. Oil refiners such as state-owned Indian Oil Corp (IOC) and Mangalore Refinery and Petrochemicals Ltd (MRPL) could use UCO Bank or IDBI Bank to route oil payments to Iran, the official added. US sanctions against Iran come into effect from November 4 and will block banking channels. The official said refiners have booked oil cargoes from Iran for the current month as well as for October. Payment for oil bought in September would be due in November as Iran provides a 60 days credit period. India had planned to import about 25 million tonnes of crude oil from Iran in the current fiscal, up from 22.6 million tonnes imported in 2017-18. But the actual volumes imported may be far less as companies like Reliance Industries have totally stopped buying oil from Iran and others too are scaling it down in hope of winning a sanction waiver from the US. U.S. Wants India to Stop Importing Iranian Oil by November, 'No Waiver on Sanctions'.

US President Donald Trump had in May withdrawn from the 2015 nuclear accord with Iran, re-imposing economic sanctions against the Persian Gulf nation. Some sanctions took effect from August 6 while those affecting the oil and banking sectors will start from November 4. The official said Iran is open to accepting rupee payment for oil and may use the money to pay for equipments and food items it buys from India. UCO Bank and IDBI Bank have been identified to route the payment as the two have no exposure to the US financial system.

UCO Bank had in the previous round of sanctions handled rupee payments.

Currently, India pays its third largest oil supplier in euros using European banking channels. These channels would get blocked from November.

During the first round of sanctions when EU joined the US in imposing financial restrictions, India initially used a Turkish bank to pay Iran for the oil it bought but beginning February 2013 paid nearly half of the oil import bill in rupees while keeping the remainder pending opening of payment routes. It began clearing the dues in 2015 when the restrictions were eased. Besides, New Delhi sought to get around the restrictions by supplying goods including wheat, soybean meal and consumer products to Iran in exchange for oil. India in Touch with EU over Alternative Payment Mechanism for Iran Oil Imports.

The official said this time around the entire 100 per cent of Iranian oil import bill can be paid in rupees. Iran is India's third-largest oil supplier behind Iraq and Saudi Arabia. It was India's second biggest supplier of crude oil after Saudi Arabia till 2010-11 but Western sanctions over its suspected nuclear programme relegated it to the seventh spot in the subsequent years. In 2013-14 and 2014-15, India bought 11 MT and 10.95 MT, respectively from it.

Sourcing from Iran increased to 12.7 MT in 2015-16, giving it the sixth spot. In the following year, the Iranian supplies jumped to 27.2 MT to catapult it to the third spot. Iranian oil is a lucrative buy for refiners as the Persian Gulf nation provides 60 days of credit for purchases, terms not available from suppliers of substitute crudes -- Saudi Arabia, Kuwait, Iraq, Nigeria, and the US. Besides blocking of banking channels from November, the absence of payment mechanism may pose a challenge to the transportation of the oil as Iranian crude is bought on a CIF basis and shipped on Iranian tankers. Under Cost, Insurance and Freight (CIF) mode of shipping, the seller assumes the responsibility of transportation and insurance. The liability and costs associated with successful transit are paid by the seller until the goods are received by the buyer.