Indian diplomacy: Heavy Lifting

Posted in America, Current Affairs, Gold Reserves, Pax Americana, politics by Anuraag Sanghi on May 22, 2012

Manmohan Singh, attacked at home with scandals and policy paralysis; internationally blamed for a placid Indian economy. No, I didn’t mean flaccid. In the middle of this has been a diplomatic triumph that he cannot talk about. But 2ndlook can …

An oil tanker loads gas in Assaluyeh seaport at the Persian Gulf, 1,400 km (870 miles) south of Tehran, Iran  |  May 27, 2006.  |  Credit: Reuters/Morteza Nikoubazl  |  Click for image.

An oil tanker loads gas in Assaluyeh seaport at the Persian Gulf, 1,400 km (870 miles) south of Tehran, Iran | May 27, 2006. | Credit: Reuters/Morteza Nikoubazl | Click for image.

Who’s knocking

It takes chutzpah to host US Secretary of State Hillary Clinton and a trade mission from Tehran on the same day. That’s what India is doing — and it has so far played the two sides off rather well. While good relations with the United States are important, Iran’s cheap oil is too attractive to pass up, and India has a long history of goodwill towards its Persian neighbour. A compromise looks likely.India has been publicly dismissive of US calls to stop doing business with Iran. Given its $185-billion trade deficit, it is not hard to see why New Delhi would rather keep trade flowing. Oil accounts for two-thirds of India’s import bill, and Iran is a major supplier. India has even been able to negotiate payment in its own currency, the rupee. That’s like a gift voucher which Tehran can only spend in Indian shops.

Clinton, meanwhile, has called for India to support US sanctions. But she can’t afford to push too hard.

Privately, the Indians seem to be more co-operative. Under pressure from politicians, refiners have cut imports of oil from Iran by 15-20 per cent. That strategy may be enough to win a waiver from US-led sanctions during Clinton’s two-day visit, assuming American politicians believe a quietly helpful India is better than an openly hostile one.

India’s best outcome would be to keep both sides happy. As Iran’s second largest customer, it is in a good position to secure a discount to the market price of oil —something it is unlikely to get from other suppliers like Saudi Arabia. And the United States may be prepared to bend its rules to keep an emerging superpower on-side. New Delhi’s diplomatic balancing act might just work. (via Tightrope diplomacy).


And behind this heavy lifting, was a bigger story!

“The dispute over Iran’s nuclear programme is nothing more than a convenient excuse for the US to use threats to protect the ‘reserve currency’ status of the dollar,” the newspaper, which calls itself the voice of the Islamic Revolution, said.

“Recall that Saddam [Hussein] announced Iraq would no longer accept dollars for oil purchases in November 2000 and the US-Anglo invasion occurred in March 2003,” the Times continued. “Similarly, Iran opened its oil bourse in 2008, so it is a credit to Iranian negotiating ability that the ‘crisis’ has not come to a head long before now.”

Iran has the third-largest oil reserves in the world and pricing oil in currencies other than dollars is a provocative move aimed at Washington. If Iran switches to the non-dollar terms for its oil payments, there could be a new oil price that would be denominated in euro, yen or even the yuan or rupee.

India is already in talks with Iran over how it can pay for its oil in rupees.

Even more surprisingly, reports have suggested that India is even considering paying for its oil in gold bullion. However, it is more likely that the country will pay in rupees, a currency that is not freely convertible. (via Iran presses ahead with dollar attack – Telegraph).

This payment ‘crisis’ was triggered when

Barack Obama signed into effect the Iran Threat Reduction Act on December 31, 2011. That Act bars foreign banks from the US if they conducted transactions with the Central Bank of Iran (CBI), a move intended to choke off Iran’s oil incomes, its main source of revenue.

The law calls for US financial sanctions on anyone settling oil trades with CBI, and comes into effect from June 28. The exceptions are White House-blessed waivers or a very tight oil market. (via Why India’s real Iran dilemma isn’t oil – Economic Times).

Show me the money

The drama of payments to Iran played itself out over the last one year with many twists and turns:

  • An ‘angry’ Iran threatening to cut oil supplies
  • India ‘outraged’ and eager to pay, but without banking options
  • US ‘determined’ and pressing India to cut oil purchases from Iran

With many rounds of shadow-boxing,

In December 2010, the Reserve Bank of India (RBI), fearing US sanctions on India’s financial sector, had walked out of the Asian Clearing Union that cleared Iran’s oil payments.

This started a merry-go-round as India scoured the world to pay Iran for its oil and simultaneously tried to reduce its dependence on Iranian oil. India began to use one of its small nationalised banks with little or no exposure to the West, to pay for the oil.

The first stop was Germany’s EIH Bank, but in a few months that stopped. Turkey’s Halkbank has been processing India’s payments to Iran since then, though there were palpitations when Halkbank refused a BPCL application. This week, Halkbank stated that it remained open for business for India. (via Why India’s real Iran dilemma isn’t oil – Economic Times).

To buffer India-Iran trade from external influences, India proposed a rupee payment system, which can be direct transaction without any third-party involvement.

Iran has asked India to pay for oil partly in yen as the two nations seek an agreement on how to maintain trade amid tightening global sanctions, according to three people with knowledge of the matter.At talks in Tehran last week, India proposed to pay its second-biggest oil supplier in rupees through a bank account in the South Asian nation. Iranian officials sought partial payment in yen because they’re concerned that they may not get sufficient value from the rupee, which isn’t fully convertible.

The nations have struggled to preserve $9.5 billion in annual crude trade. The Gulf nation is concerned that India’s entire crude oil bill can’t be paid through exports to Iran, the people said. Iran’s imports from India are worth about $2.5 billion a year, while its annual oil sales to the South Asian nation are valued at about $9.5 billion, the people said.

Iran also wants India to invest in non-strategic infrastructure projects in return for crude supplies, the people said. (via Iran Said to Seek Yen Payments From India for Oil Amid Sanctions – Businessweek).

India and Iran agreed to use the Indian rupee for oil-trade with Iran. On this development, Indian media reported,

Dismissing the possibility of US sanctions impacting India-Iran ties, Tehran on Tuesday announced that the two countries have worked out a new mechanism for oil payments, following which Indian energy firms will pay for 45 per cent of their crude oil imports from Iran in rupees and rest through barter and semi-barter system.

This mechanism for future payments was arrived at a meeting between officials of the two nations in Tehran in mid-January. India has cleared all oil payment dues till date.

“A suitable mechanism has been found out. All the money not paid by India last year has been paid,” Iranian envoy to India Syed Mehdi Nabizadeh said.

“This was the proposal by India and we accepted it. Both the sides are satisfied,” Nabizadeh said.

India is keen to use the new mechanism as it fears that the current payment route through Turkish bank may end due to fresh US sanctions.

The Iranian envoy said the two countries are looking at mechanisms for payment of the remaining 55 per cent.

Iran could increase its imports of goods from India to settle part of the payments, Nabizadeh said. Indian companies are also expected to invest in projects in Iran, such as developing oil and gas fields, extracting iron ore, building roads and railways and purchasing fertilisers. India could also export iron, steel, machinery, equipment, agricultural products like rice, and minerals to Iran that faces international sanctions.

Nabizadeh, however, ruled out gold as an option for oil payments. “Gold is not suitable,” he said. (via India resolves Iran oil payment issue : India News – India Today).

Hits and Misses

Rupee-trade would have another benefit for India. Indian demand for US dollars will reduce by about 4%-6%. Coincidentally, around the same time (December 2012), the dollar started appreciating against major currencies – except the yen. Rupee-trade is something that India and the former Soviet Union used effectively for more than 20 years. Prime Minister Manmohan Singh

discussed alternative financial conduits with Russian officials during his visit to Moscow in December. India, which got 11 percent of its crude imports from Iran last year, is exploring the option of making payments for Iranian crude through Russia’s Gazprombank OJSC, though no deal has been reached, three of the people said Jan. 9.

For Iran this rupee trade limits the usage of oil-sale realizations to purchases from India. Based on this Iran would limit oil sales to India – which it has done. This is possibly behind the fig-leaf of 11% cut in oil-purchases from Iran.

This is in the short-term. In the medium term, both countries are looking at ways forward that are not dependent on external players.

Amid talk of reducing crude imports from Iran, and barely a week after US secretary of state Hillary Clinton’s visit to India, Iranian President Mahmoud Ahmadinejad has called Prime Minister Manmohan Singh, urging him to expand bilateral ties in “different fields”.

India declared that it is reducing its dependence on any particular region for crude import – even if not under Washington’s pressure. Ahmadinejad spoke to Singh on Monday evening

In his conversation with Singh, Ahmadinejad insisted that bilateral cooperation between India and Iran would lead to considerable achievements for both nations. Singh responded that widening ties with Iran was on the basis of “national interests”.

In yet another sign that Iran is trying to reach out to India, despite the oil cut, government sources said Tehran was likely to send its foreign minister, Ali Akbar Salehi, soon to invite Singh for the 16th NAM summit to be held in Tehran in August and for bilateral talks with Ahmadinejad. (via Amid oil cuts, Ahmadinejad speed dials PM Manmohan Singh – Times Of India).

But before this was another bombshell – using adequate safeguards of ‘plausible deniability’. An Israeli website, ‘revealed’ that India had dropped an atomic bomb on the US dollar.

India would use gold to pay Iran for oil.

New Delhi: An Israeli website has suggested that India has agreed to pay Iran in gold for oil purchases, but Indian authorities have called the report “speculative”.

In an “exclusive report” on Jan 23 this year, the website, debka.com, quoted Iranian sources as saying that “India is the first buyer of Iranian oil to agree to pay for its purchases in gold instead of US dollars”.

However, Indian government officials said the report was “speculative” and hence did not merit any response. (via Gold for Iran oil report speculative: India – India News – IBNLive).

If gold usage became common to settle oil transactions, it would be the end of the Euro and the US dollar as we know it. US Govt. debt (US$15 trillion) is roughly equal to global trade and speculation in oil.  If that oil-trade started to get settled in gold,

  • gold prices would appreciate (choose any number between 100%-500%)
  • Global demand for US dollar would reduce by about US$ 10trillion-US$ 20trillion in 12-36 months.

All this serves or damages US interests. But, it serves no short-term Indian  interest to rock the boat.

So, what is driving Indian thinking and actions?

360 degrees

Is it an oil ‘shortage’?

India has been reducing oil imports from Iran, ever since Saudi Arabian King Abdullah’s January 2006 visit here. Iraq, which is rejoining the global oil market, is also a big oil source. Then there is Nigeria, though internal problems there may impact its capacities soon. Thus, there is unlikely to be an oil supply problem in the world, despite the IMF hyperventilating about a “supply shock”.

Between the Saudis, Iraqis, Libyans and Russians there is enough extra oil, close to 1 million bpd more oil may be coming from these producers alone. Besides, the 600,000 bpd that Iran currently sells to the EU will soon be free for countries with the nerve and muscle to ignore sanctions. (via Why India’s real Iran dilemma isn’t oil – Economic Times).

Unlike Iran, India does not harbor any ill-will against the US or the West. In which case why is India playing so hard?

But as a past sufferer of international sanctions, India, like China, fundamentally dislikes them. They end up penalising the poor citizen, but keep elites in business. We can expect that a further set of UN sanctions against Iran would die at the hands of China and Russia.

So, is the nuclearization of Iran a true story?

Iran though is determined to get a nuclear weapon, despite all it’s protestations to the contrary. In conversations with the Indian leadership, Iranians said they took away a couple of lessons from current events.

Muammar Gaddafi, who gave up his nuclear programme to the West, died in a “West-imposed” conflict. But North Korea’s Kims (the late father and the successor son) remain untouched despite them being serious nuclear bad boys. That, Iranians said, was because North Korea has the nuclear device. The world needs a different narrative if Iran has to be weaned away from its nuclear dreams.

In which case the next question is …

What has India gained?

First, let us look at how India looks with the US Axis.

The Barack Obama administration will be delighted that the sustained diplomatic and political pressure on India is finally bearing fruit. Meanwhile, a protagonist lurking in the shade is all excited – Saudi Arabia.

A mystery lingers. What did the Obama administration promise the Manmohan Singh government as quid pro quo? Manmohan most certainly sensitized US Secretary of State Hillary Clinton of India’s “wish list” during her recent hurried visit to hold consultations personally with him just ahead of the US-India Strategic Dialogue co-chaired by her, which is scheduled to convene in Washington.

Delhi has been under immense pressure from Washington to fall in line with the letter and spirit of the US’s sanctions on Iran over its nuclear program and curtail the sourcing of crude oil from Iran. (via Asia Times Online :: India dumps Iran, squeezes Obama).

What about Iran? How does Iran feel about this? One reading seems to suggest

India is shrewdly exploiting Iran’s current vulnerabilities. Thus, by taking advantage of the obstacles being put by the US on the Asian Clearing Union payment mechanism of India-Iran trade, New Delhi persuaded Tehran to accept a system of barter trade for up to 45% of its oil exports, which would effectively work as an export promotion drive for Indian companies in the Iranian market.

Iran accepted the deal grudgingly since it is keen to continue somehow or other with its longstanding relationship on oil with India through the present difficult corridor of time. The heart of the matter is, remove oil from the Iran-India relationship and it will atrophy to virtually nothing. Evidently, New Delhi has assessed that the relationship means more to Iran than to India at the moment.

Iranian President Mahmud Ahmadinejad telephoned Manmohan on Monday in an attempt to shore up the relationship. He stressed that Tehran sets no limits to the broadening of ties with India and that the traditional, historical relationship has been of a “brotherly” character and is assured of a “promising future”. Manmohan responded with a caveat that India attaches importance to ties with Iran and welcomes a broadening of relations with Iran “on the basis of national interests”.

There is some evidence that Tehran is also settling for a low-key relationship. Tehran parried repeated Indian attempts to schedule a visit by the secretary general of Iran’s Supreme National Security Council, Saeed Jalili, to New Delhi. Tehran estimates that the consultations are best scheduled when New Delhi is genuinely open to strategic engagement with Iran. (via Asia Times Online :: India dumps Iran, squeezes Obama).

To some the question remains

the big question still remains: What is it that India hopes to extract from the Obama administration in return for its momentous decision to comply with the US’s Iran sanctions?

Indian diplomacy is hard at work. Starting from 2006 when India began voting against Iran in the International Atomic Energy Agency, Iran has become a factor in the US-India strategic partnership and New Delhi has been able to leverage it because Washington is extremely sensitive to Iran’s regional standing.

Manmohan’s timing is superb. Although Obama needs to take a decision on giving a “waiver” to India under the Iran sanctions regime only in July, Manmohan took the decision now to cut India’s oil imports from Iran.

Clearly, New Delhi has set its sights on the forthcoming US-India Strategic Dialogue in early June. After having discussed with Clinton during her recent visit the future directions of the US-India strategic partnership, New Delhi expects a tradeoff.

Obama’s political prestige is at stake over the Iran nuclear issue, especially in a tricky presidential election year for him. Manmohan is handing over to him a major foreign policy “achievement” in making Tehran look somewhat more isolated in its region just when the talks over the Iran nuclear issue are moving into a crucial phase.

If Indian diplomats are worth their salt, they are tiptoeing toward the US-India Strategic Dialogue with a killer instinct; they won’t settle for some two-penny worth gains. (via Asia Times Online :: India dumps Iran, squeezes Obama).

Why is Iran so important to India.

Iran is a counter-balance to the anti-India axis of China-Pakistan. Pakistan would be hard-pressed to fight a war against India alone. If aided by China, India could play the Iran card. What is in it for Iran?

Why would Iran do it?

Historically, at times Iran has ruled over modern Baluchistan and parts of Afghanistan. These territorial ambitions of Iran would become reality. Iran would justify the annexation to protect the Shia Muslims of Pakistan of a ‘crumbling Pakistan’.

Just months before the outbreak of the 1857 War against the British, both Iran and Afghan rulers had been negotiated into neutrality by the British. So, while the British Raj was fighting for its empire, and India for its freedom, was alone.

Possibly, this lesson has not been lost on Indian diplomats.

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8 Responses

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  1. admin said, on May 22, 2012 at 6:41 am

  2. […] Indian diplomacy: Heavy Lifting (2ndlook.wordpress.com) […]

  3. masculineffort said, on May 25, 2012 at 5:56 pm

    There is no way that Indians are paying for the Oil in Gold. First, the Indian government does not have that much gold. It has about 400 tonnes which is worth $24 billion at current prices. That is about 3 months of oil imports. Second, India can get Oil for Gold from any country in the world. Why the hell should we do that for Iran? The fact is we are paying for it in Rupees and while the Rupee is a weak (comment edited here) currency, Iran has no choice but to accept it. They do not have a strong bargaining position. They know it. We know it. The world knows it. the Dog knows it and so does the cat.

    PS – masculineffort. At the 2ndlook forum we don’t believe that bad language is either masculine or feminine. Please ensure that your language reflects the respect and consideration that you expect to receive.

    • masculineffort said, on May 27, 2012 at 3:02 pm

      No offense meant friend. Even though I might have used an offensive word, it was not an attack on any commentator. Point taken though. I will use strictly parliamentary language while commenting on your blog.

  4. virendra1984irendra said, on May 28, 2012 at 1:26 pm

    I’m puzzled on how Iran swallowed the reduction of 15% in Oil supply along side the payment in Indian currency, which it didn’t prefer. Triumph indeed .. but for how long?


    • Anuraag Sanghi said, on June 9, 2012 at 8:46 am
      Actually the reduction of 10%-11%-15% in Oil supply, quoted by various reports was a natural outcome. Iran has limited use of rupees. Their oil exports will be dictated by what they can do with the earnings.

      This way India gets rupee payment
      Iran stands up to the US.
      US is satisfied that India has reduced imports.

  5. Nationalist said, on June 4, 2012 at 3:52 am

    Have you seen this http://www.punemirror.in/article/62/2012050420120504025313609120ae2ba/RBI-gets-HC-notice-to-explain-gold-deposits-with-Bank-of-England.html
    Wonder whats the rationale with such a move.

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