21 June 2016

Getting around the U.S.’s Persian block

June 21, 2016

The fault lies outside: “Perhaps Iranian President Hassan Rouhani realised that there was no bad faith on India’s part with regard to the efforts it had made to address the issue of delay in payments.” PM Modi with Mr. Rouhani in Tehran.

A close look at the Indian delay in oil payments to Iran will show that it was attributable solely to U.S. sanctions, a point the Iranian leadership appears to have noted

Prime Minister Narendra Modi’s visit to Iran a month ago was significant on all counts. As he himself said: “…[the] visit was fruitful” and it is sure to have had a positive impact. The discussions signalled an eagerness by India and Iran to promote bilateral ties. Twelve agreements were signed, the most strategic of them being the one for the development of Iran’s Chabahar Port.

Before the visit, several policy analysts flagged important issues in areas such as energy and trade, with the most troublesome of them being India’s delay in remitting oil dues estimated at $6.5 billion for crude supplies made in recent years. Hurried arrangements were made to remit a sum of $750 million days prior to Mr. Modi’s visit.

Most surprisingly, it appears that the issue did not come up for discussion at all. From the press briefing by Mr. Modi and Iranian President Hassan Rouhani, it was clear that both had convergence on the extraordinary situation created by the U.S. until the conclusion of the Joint Comprehensive Plan of Action (JCPOA) — the international agreement on the nuclear programme of Iran reached in Vienna in 2015 between Iran, the P5+1 (China, France, Russia, United Kingdom, United States plus Germany), and the European Union — leading to the lifting of sanctions against Iran.

Blame it on U.S. sanctions

A close look at the delay in payments by India will show that it was attributable solely to U.S. sanctions. Perhaps, Mr. Rouhani realised that there was no bad faith on India’s part with regard to the efforts it had made from time to time to address the issue.

Prior to December 27, 2010, India had arranged to make payments through the Asian Clearing Union (ACU), a mechanism established in 1974 by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). The U.S.’s Iran sanctions commenced in 1979 after the Islamic Revolution. Over time, these began to bite hard, extending their reach globally to include a ban on transactions with “designated” banks and parties. It culminated in the passage of the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISDA) from July 1, 2010 which denied Iranian banks even access to SWIFT — the global financial network that banks use to transfer money. This was unilateral, illegal and not covered by United Nations Security Council (UNSC) resolutions.

The ACU became a victim of CISDA as the U.S. Treasury began to view it as an agency defeating sanctions. The Reserve Bank of India also yielded to U.S. pressure and terminated the ACU.

Indeed, it was a precipitate step done without prior consultations with the Iranians and resulted in a crisis considering that India imported 20 per cent of its oil from Iran valued at $12 billion per annum. There were hurried consultations with the Iranians. After six weeks, a new arrangement was reached to route payments through the Hamburg-based Europaisch-Iranische Handelsbank AG (EIH). The system, legally perfect inasmuch as it complied with UNSC sanctions while bypassing the U.S.’s sanctions as payment was in euros, was hailed as a “diplomatic feat” by some analysts.

Unfortunately, the arrangement was stillborn. The EIH had long been suspect in the U.S.’s eyes and viewed as an agency which openly violated Iran sanctions. The State Department could prevail upon German Chancellor Angela Merkel to terminate the arrangement. Sadly, India’s payment gate became hostage to the vagaries of U.S.-German diplomatic relations. Germany terminated the EIH gate abruptly without so much as informing the government of India.

Payment maze

Back to square one, India made desperate efforts to make payments through Russia which had dealings with Iran and also through some banks from the United Arab Emirates operating in the grey market.

Even as India was looking for a new payment route, its policymakers took note of the rise of Turkey as a lead player in West Asia and its growing economic relations with Iran. Turkey was also observed to distance itself from the U.S. over its policies such as sanctions and Iran’s nuclear ambitions.

India noticed that the state-owned Halkbank of Turkey playing a growing role in promoting trade with Iran and remitted $100 million, but for a short duration. Unfortunately, the arrangement was aborted as Halkbank lost its elbow room when Iranian banks were “designated” by the U.S. Treasury and lost access to SWIFT.

India was again clueless. After prolonged negotiations, an agreement was reached with Iran to pay 45 per cent of the dues in rupees and the balance 55 per cent in escrow accounts of Iranian banks with our banks. The escrow amount could be remitted only after sanctions are lifted. Sadly, unlike in the case of China, they could not be cleared bilaterally due to a heavy trade imbalance. The backlog since 2013 began to balloon.

In the meantime, disputes arose over exchange rates for past supplies and the interest payable on outstanding amounts, but were settled amicably. India agreed to pay interest at LIBOR rate (1.5 per cent), though the bilateral agreement did not provide for it. These were gestures made in good faith in the hope that sanctions would come to an end soon, as negotiations had commenced in 2006.

An interim agreement, the Joint Plan of Action (JPOA), was signed between Iran and the P5+1 in Geneva in November 2013. However, sanctions were lifted in a limited manner, restricted to certain categories of transactions. In terms of the JPOA, oil dues of $4.2 billion held in central banks of China, India, Japan, South Korea, Taiwan and Turkey were allowed to be remitted in a phased way. India availed of this slot and arranged to remit $1.65 billion.

Though JCPOA was signed in 2015, it is still a work in progress, neither having led to the lifting of all sanctions nor giving Iranian banks the full freedom to operate globally. As per JCPOA, all sanctions — UN, the U.S. or EU — will not be lifted till October 18, 2025. Only limited relief has been granted. The sanctions bundle is so complicated and riddled with a backlog of trade, human rights and other abuse-related sanctions that it is impossible for banks to operate on the basis of the limited window opened without falling foul of the U.S. Treasury. As the Financial Times detailed in an article (February 14, 2016), Iranian businesses are still hobbled by the sanctions fallout. It does seem that the U.S. is not ready to open all doors. There is the lurking fear within the country that Iran could use the money to finance militant non-state actors.

Lastly, when compared with assets blocked globally estimated at $100 billion of which oil assets contribute $89.6 billion, India’s share of $6.5 billion is small. This came about because of U.S. sanctions and not due to wilful default by us. It is certain that the Iranian leadership would have taken note of these and did not make it an issue.

Kandaswami Subramanian is a former IAS officer who had served in the Finance Ministry.

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