There are issues of availability of insurance, vessels for carrying oil
External Affairs Minister Salman Khurshid as well as Indian diplomats on Tuesday explained that Petroleum Minister Veerappa Moily’s solution of reducing foreign exchange outgo by importing oil from Iran — which accepts part of the payment in rupees — was not as simple as it seemed.
“There are issues of availability of insurance and vessels for carrying oil and of a banking system active and ready to be used for payments,” Mr. Khurshid told journalists here.
“Mr. Moily’s suggestion sounds good in principle — buying oil from a country which accepts part of the payment in rupee. Because of several unresolved issues, the immediate solution is not more of Iranian oil,” said government sources.
Saying that Commerce Minister Anand Sharma was in touch with many oil producing countries on this issue, Mr. Khurshid pointed out that this was a critical moment “in which we need to do some tidying up and we will get over the situation in the not too distant future.”
The sources dwelt in detail on why it will be difficult to source more oil from Iran. The first is the American insistence to a group of 20 countries to “significantly” cut down import of Iranian oil. Among them, Japan, South Korea, China and India are the major importers and the U.S. has been giving them six-monthly exemptions provided they demonstrate their dependence on Iranian oil is going down significantly.
As is the case with other countries, India too has fallen in line with Washington’s desire although like China it does not recognise unilateral sanctions imposed by a group of countries. Though the U.S. never spelt out what “significant reduction” means, these countries have informally understood it to be in the range of 11 to 15 per cent. India has been getting automatic exemptions without applying for them (unlike China) because its reduction has been much higher.
Second is the problem of re-insurance. Essar and MRPL are learnt to have spent $2 to 3 billions each in reinsuring their refineries that depend on Iranian oil. Further refining of Iranian oil will only be possible if other refineries pledge similarly huge sums to re-insure their refineries. The government has already set in motion a general pool of such insurance and it is expected to gather pace gradually. Thus, officials say, the solution is not immediate but will take time.
The third is the problem of making payments for the oil. The West controlled financial system has barred oil payments being made to Iran. Entities doing so face the threat of being shut out of the western financial system which will cripple their business in other countries and sectors. India and Iran have worked out a formula for making payments — 45 per cent in rupees and the rest in hard currency.
Iranians have often suggested third destinations for routing this payment but India would prefer to play it straight. As a result Iran has been unable to utilise over Rs. 25,000 crore accumulated in a UCO Bank account. The government sources feel Iran will be able to utilise this money to import Indian goods but the process will again take time to mature. The same cannot be said about the Rs. 35,000 crore in hard currency that India has to pay Iran but cannot find the mode of doing so because of western sanctions.