Halt in Iranian oil supplies to India to damage both countries

Oil&Gas Materials 11 July 2011 09:23 (UTC +04:00)

Azerbaijan, Baku, July 7 /Trend, T.Konyayeva/

Tehran and New Delhi should resolve the issue of payment for Iranian oil through a peaceful and diplomatic way, because a cardinal solution to the problem by stopping the supply of Iranian oil to India would damage both countries, said Paul Sullivan, Professor of Economics at the U.S. National Defense University and Georgetown University.

"Both sides should work out this issue diplomatically and smoothly," Sullivan wrote Trend in an email. "If Iran cuts off its oil to India that would be proof positive of severe irrationality in some of the leaders of Iran. It could also cause great hardship in India, a country with many people who already facing hardships."

On July 4, source at the Iranian oil ministry said that Tehran's recent warning notice to New Delhi about a possible halt in oil supplies to India due to continued overdue payments was not a formal letter from the National Iranian Oil Company (NIOC), Fars News Agency reported.

Earlier, the Wall Street Journal quoted executives at two Indian refiners as saying that they have got the letter from NIOC warned it will stop crude oil supplies to India from August if its long-pending bills aren't cleared and a favorable mechanism for future payments isn't set.

India owes Iran $2 billion for oil supplies in recent months because it coudln't transfer money to Iran due to U.S. sanctions on IRI, which Washington suspects of seeking nuclear weapons.

According to Sullivan, Iran could send an official letter because Iran's oil industry is run mostly by the government.

"Iran's leadership is playing with fire on this. India is a powerful country. The Iranians may just lose a large market in India if they are too harsh with them. Once again we see short term thinking harming strategic thinking in Iran," he told.

Iran is the second largest crude supplier to the country after Saudi Arabia and accounts for about 12% of India's annual oil needs.

Sullivan thinks Saudi Arabia could fill in some of the oil lost as could the UAE.

The two countries are trying to negotiate a new payment mechanism since December when the Reserve Bank of India stopped payments through the Asian Clearing Union which the U.S. says is opaque and could be used by Tehran to finance its alleged nuclear weapons program.

In early February, India and Iran decided to introduce a new mechanism for payment by India. Under the new payment mechanism, the Indian oil companies will transfer funds to the account of the National Iranian Oil Company in Hamburg-based Europäisch-Iranische Handelsbank (EIH Bank) through the Reserve Bank of India.

But later Germany stopped accepting money from India for Iranian oil payments following criticism from the U.S.

In September 2010, the U.S. Treasury Department accused the EIH Bank of making payments to facilitate the financing of Iran's nuclear program, including $3 million in 2007 to acquire material for Iran's missile programs, and in mediation for several Iranian banks, which are closely linked to government. The U.S. Department has added the EIH Bank in its list of financial institutions whose activities are blocked.

On July 6, Iran's caretaker Oil Minister Mohammad Aliabadi said Iran will not cut oil supplies to India, which will find a way to pay for its exports within the next two months, Reuters reported with reference to IRIB website.