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Barrel of trouble

India must focus on diversification of its energy supplies.

Written by The Indian Express |
January 3, 2011 3:09:13 am

There is no doubt that the Reserve Bank of India acted in haste last week in announcing a suspension of payments to oil imports from Iran through the long-standing arrangement with the Asian Clearing Union (ACU). It has now sensibly restored the status quo ante — the ministry of external affairs described this as a “technical issue” — until alternative arrangements are finalised with Iran. The reversal,however,does not resolve the basic problem: the increasing difficulty of doing business with Iran. As the UN and the West tighten the sanctions noose around Iran amid the refusal of Tehran to resolve its nuclear disputes with the international community,India has no option but to adapt. As a good international citizen,India has a long record of faithfully implementing sanctions imposed by the Security Council. The issue at hand is not about imports of oil from Iran,which are not prohibited by the current UN sanctions. But the range of measures adopted by the international community against the banking and finance sectors of Iran has complicated the system of payment for those petroleum imports.

The US argues that the ACU system is opaque and does not allow efficient monitoring of fund transfers to various Iranian entities under sanctions. The ACU settles accounts on a net basis every two months. Responding to pressures from the marketplace,the RBI chose to act. But given the scale of India’s oil imports from Iran — about 400,000 barrels of oil a day,nearly 14 per cent of its requirement — the consequences of a potential supply disruption compelled the RBI to backtrack.

As it engages Iran,the RBI must prepare for some hardball negotiations. There have been signals from Tehran that it will not accept payments outside the ACU. The fact,however,is that Iran has agreed for such arrangements with others. South Korea,a major customer of Iranian oil has begun to pay in its national currency,the won. In the short term,Delhi must avoid the trap of politicising the issue and focus on the practical steps needed to sustain the oil trade with Tehran,that Iran too badly needs. In the long term,though,India must focus on further diversification of its energy supplies. Delhi should step up its engagement with Saudi Arabia,which is the world’s largest oil producer,and other petroleum-producing states in the Persian Gulf. Saudi Arabia and other Gulf states are deeply concerned about Iran’s nuclear programme and are looking for security partners. Delhi must act purposefully to build on the natural convergences with Saudi Arabia on energy security and regional stability.

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