Agree to set up a payment mechanism to facilitate bilateral trade

In a significant development indicating a breakthrough in resolving the India-Iran payment crisis for import of oil as well as exports, both countries have agreed to set up a payment mechanism to facilitate bilateral trade.

According to the Finance Ministry, both sides agreed on the mechanism to be put in place for the purpose, including for the payment to Indian exporters and project exporters. Although the statement did not indicate but this would also include payments made by India for buying Iranian crude oil. The issue of payment for oil had been hanging in fire for the last nine months with the Indian side grappling for a solution on the issue.

The agreement follows a meeting between Department of Economic Affairs (DEA) Secretary R. Gopalan with Iranian delegation led by Vice-Governor of Central Bank of Iran Seyed Kamal Seyed Ali. The Finance Ministry statement said both sides agreed to continue their engagement in the matter.

The problem over payment to Iran arose after the Reserve Bank of India on December 23 last scrapped the Asian Clearing Union (ACU), winning appreciation from the U.S., which is using sanctions to force Tehran to halt its nuclear programme.

Although Iran has continued to supply crude oil to India , it had threatened to stop supplies if a mechanism to pay for imports is not found quickly. Iran is second only to Saudi Arabia as an oil supplier to India, while India is Iran's second-biggest crude buyer after China, accounting for about 20 per cent of its exports. Iran supplies 12 per cent of total oil needs of India.

The Indian exports as well as the oil marketing companies have been struggling to pay Tehran because of international sanctions imposed over Iran. The sanctions include banking restrictions. An interim solution was found wherein Indian companies were to make payments through Turkey. The Indian companies such as Mangalore Refinery and Petrochemicals were to route euro payments to state-owned Turkiye Halk Bankasi (Halkbank) in Istanbul. The bank then transferred the money to the account of the National Iranian Oil Company. In the absence of a clearing system run by regional central banks, refiners in February made one big payment through Germany-based Europaeisch-Iranische Handelsbank (European-Iranian Trade Bank). However, soon after the payment, this route was discontinued.

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