India’s refiners will bypass US sanctions by paying for Iranian oil in rupees

• As the US sanctions on Iran are set to take into effect in November, the Indian government has been ordered to wind down its purchases of Iranian oil.
  
• This will be difficult. India is the second-largest buyer of Iranian crude oil, which is cheaper than oil sourced from other countries.
  
• Therefore, in order to bypass sanctions, Indian refiners will pay for Iranian oil in rupees and route payments through UCO Bank and IDBI Bank.
  
  

When the Trump administration decided to pull out of the Iran Nuclear deal earlier this year and re-impose sanctions on Iran, the Indian government likely panicked. India is the second-largest buyer of Iranian crude oil, sourcing more than 10% of its overall oil imports from the Middle Eastern country.

Iran provides the commodity at significantly lower prices than other countries and also offers India a host of perks such as extended credit terms and cheaper freight costs. This has manifested itself in higher purchases. India’s oil imports from Iran more than doubled to 27.2 million tonnes in the previous financial year.

As the US-led sanctions are set to take into effect in November, the Indian government has been ordered to completely wind down its purchases of Iranian oil or risk violating sanctions.

However, cutting imports to zero from Iran is unlikely because India simply cannot switch to more expensive sources of crude oil overnight without adverse short-term effects on its already-widening current account deficit and dramatic adjustments to its refineries, which are calibrated to process Iranian oil. Besides, Indian consumers cannot stomach a continued hike in fuel prices.

Thankfully, it seems that India has found a way to bypass US sanctions for the time being even as it has reduced imports. Much like they did before the Iran nuclear deal was signed in July 2015, India’s oil refining companies will pay for Iranian oil in rupees instead of euros and dollars starting 4 November, according to the Economic Times. In turn, Iran will use the rupees to pay for Indian imports.

The refiners in question - Indian Oil Corp, Nayara Energy and Mangalore Refinery and Petrochemicals - will route payments through UCO Bank and IDBI Bank, which have domestic branches in Iran and don’t have any exposure to the US.

UCO Bank handled oil payments when the first round of sanctions came into effect in 2011. During 2011-2015, India also routed a portion of the payment to Iranian oil companies through Turkey’s Halk Bank. With regards to the latest round of sanctions, India was said to exploring alternative payment options for Iranian oil with the EU. However, it seems that nothing came of the talks.