A crude test of patience for an age-old friendship

Can India honour its debt obligations to Iran for purchase of crude oil? That is the question uppermost on the minds of Indo-Iran trade watchers. Though few are willing to go on record on this vexatious subject, murmurs of discontent can be heard.

“Before the Revolution in Iran, when India had confronted a similar problem of sanctions by the US, Iran came to India’s help by providing it oil on attractive terms. That was a time when Iran was pro-West and India was non-aligned,” says a knowledgeable source. “Today, India is becoming more pro-West, and Iran more non-aligned. Today, sanctions are off India’s back, but Iran struggles under them. At a time like this, the least one expects of India is to meet its debt obligations.”

“We think India will, and must, find an answer to this problem,” says Ali Mohammadi, consul general, Islamic Republic of Iran.

“We have enjoyed good relations with India for centuries, and we think that this matter will also get resolved soon. In fact, since oil does not come under the sanctions, and also because we continue to receive payment for the oil we sell to countries like Japan, Italy and South Korea, we do not see any reason why India too will not be able to manage this problem of paying to Iran the money for the oil it purchases from Iran.”

In fact, oil supplies worth around $1 billion continue to be made to India every month, even though payment for the oil ran into rough weather some six months ago.

Earlier, India used to pay for the oil to Iran under the Asia Clearance Union arrangement it had with Iran. That ran into problem, possibly on account of pressure from the US which leaned heavily on India to stop oil purchases from Iran. Then there were attempts to make some of the payments through EIH, the Iran-Europe Bank headquartered in Hamburg. But this arrangement too appears to have come under some strain, and India is trying to explore yet another window for making its payments that have run into “several billion dollars by now.”

Contrary to media reports, it is unlikely either country will want to break off trade ties.

India has never claimed that it does not owe Iran the money that is owed on account of the oil purchased. Moreover, the Iranian grade of crude oil (sweet crude) is most suitable for Indian refiners, particularly the one at Mangalore, which has 60% of its crude requirements coming from this country.

Nor would Iran want to end a relationship with India which dates back several thousands of years. It also needs to sell its oil.

The big issue will be how much more pressure the US will bear on India. After all, India is not the only country to purchase oil from Iran. Countries like Japan and Italy also purchase Iranian oil and regularly pay for it. Obviously, there are some levers that the US has been applying selectively on India to make it go slow on amounts due to Iran.

A similar issue confronts gas supplies. Pressured by the US, India was compelled to abandon the Iran-Pakistan-India (IPI) gas pipeline. Though the official reason appears to be that India could not get security guarantees from Pakistan for this pipeline, there are few takers for this line of argument. This scepticism gets reinforced when one bears in mind that India has tilted more towards the concept of a Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline.

“It is absurd that the passage through four countries offers greater security than the passage through three countries, says an observer. “Further, the TAPI line would have to go through extremely high mountains in Afghanistan which means freezing temperatures and additional security risk.”

Clearly, someone wanted Iran out of the gas deal with India, even though it made more commercial sense. On its part, Iran has already begun work on the 1,100 km pipeline to the Pakistan border from where the latter could take gas whenever it likes. “We have always maintained that our doors are open for India when it comes to long-term gas purchases. The rest is up to India,” says Mohammedi.