US sanctions to hit Iran oil payments via UCO Bank

Written by fe Bureau | New Delhi | Updated: Feb 29 2012, 08:59am hrs
With the US deciding to place under sanctions even foreign government-owned banks for trading in petroleum products with Iran, there is renewed pressure on India to look for fresh suppliers. The new set of sanctions announced by US will make payments from India to Iran for oil imports routed through public sector UCO Bank impossible, three months down the line.

Under the new measures by US Treasury, sanctions will be imposed on government-controlled foreign financial institutions, including foreign central banks, if they are found to be knowingly conducting or facilitating the sale or purchase of Iranian oil as of June 28, 2012.

But it will only use that power if the US President determines that sufficient supply exists from other countries to allow for a significant reduction of purchases from Iran by or through those institutions. For India , since Saudi Arabia is more than willing to step into the breach, it will be difficult to argue that there is no substitute for Iranian oil.

The Indian finance ministry in its efforts to resolve the payment issue had finalised a plan to make 45% payment to Tehran through the UCO Bank in rupee. But the latest sanctions will make this mechanism difficult to sustain for long.

Under the law, the fact sheet said, there is an exception from the sanctions should the secretary of state report to US Congress that the country with primary jurisdiction over the foreign financial institution showed a significant reduction in crude oil purchases from Iran.

United States Treasury Department on Monday announced measures, which penalise foreign financial institutions for doing business with Iran's central bank or a US-blacklisted Iranian entity, and contain time-based triggers for imposing the sanctions. Disruptions in oil supplies and tensions between US and Iran have already jacked up oil prices, which are hovering above $120 a barrel.

Earlier this month, despite the sanctions by the US and the European Union, India was working to step up its energy and business ties with Iran, with a commerce ministry team visiting Tehran recently. Enhancing trade ties is part of a strategy to pay for Iranian oil. Sources suggest that only those companies can make investments in Iran which have no exposure to US. Sources also say Indian authorities are informally discussing the Iran issue with the US. Government sources confirmed that the finance ministry has sent a note to the cabinet committee on securities.

Separately, India is considering providing sovereign guarantee to domestic shipping lines for import of crude oil from Iran, which is facing sanctions from the US and Europe. The sanctions prohibit EU-based entities from providing insurance and guarantees for transportation of oil from Iran. Most Indian shipping lines take protection and indemnity cover mainly from them.

The government is exploring options like sovereign guarantee and Cost&Freight (C&F) for importing crude from Iran in the wake of European sanctions...A decision will be taken in the next two-three months, said shipping secretary K Mohandas.