With increased power comes increased responsibility, U.S. president Barack Obama told Parliament in November after endorsing a permanent seat at the U.N. Security Council for India. What he meant, of course, was that he expected India to use its position at the global level to bat for American causes and never undermine them. So was the Manmohan Singh government trying to demonstrate its “responsibility” when it banned Indian companies from using the Asian Clearing Union to process payments for Iranian oil imports? On paper, the decision was taken by the Reserve Bank of India and, again, on paper, the RBI is supposed to be independent of the government. The net effect, however, is that India has finally acted on a long-pending demand of the U.S. Treasury Department to shut down the ACU route. The ACU was set up in 1974 by Iran, India, and other South Asian countries. Its purpose is to facilitate intra-regional trade by allowing import bills to be settled through mutual book-keeping arrangements at the nine central banks that are part of the Union. With the U.S. and a number of European countries using extraterritorial financial sanctions as a lever to get the rest of the world to stop trading with the Islamic Republic, it has been getting increasingly difficult for companies from India and elsewhere to open dollar or euro-denominated letters of credit to pay for transactions involving Iran. Two years ago, the Iranians suggested the use of the ACU and the mechanism was working well.
Washington objected to the ACU for two reasons. First, individual transactions were effectively shielded from its scrutiny and second, because it allowed the Iranians to do an end run around the financial restrictions the U.S. and its allies are imposing as part of their effort to put the squeeze on Tehran over the nuclear issue. India, which imports nearly $12 billion worth of crude from Iran annually, has much to lose if Iranian supplies are effectively blocked from reaching world markets through extraterritorial sanctions. Which is why it is surprising that it tamely went along with the U.S. pressure on the use of the ACU. No doubt an alternative payment mechanism for Iranian crude will be found but having tasted blood, the U.S. will keep pushing India to cut its energy ties with Tehran. Already, the meek attitude of the Manmohan Singh government in the face of American pressure has seen Indian companies opting out of lucrative investment opportunities in Iran. There is also a wider political and strategic cost involved, especially in Afghanistan where India has to think about how to safeguard its long-term interests in the face of continuing Pakistani hostility. It is time the government realised India cannot safeguard its interests in the region by appeasing Washington on Iran.