Islamic Republic of Iran Oil Minister Massoud Mirkazemi, center, speaks during an Organization of Petroleum Exporting Countries (OPEC) meeting in October 2010 in Vienna. India is cooperating with the U.S. and Israel to isolate Iran.
Originally uploaded by Pan-African News Wire File Photos
By JAY SOLOMON And SUBHADIP SIRCAR
Wall Street Journal
India has tightened the web of sanctions around Iran by barring Indian companies from a range of deals transacted through a key trade-finance clearinghouse.
India is Iran's biggest trading partner in business done through the Asian Clearing Union, originally set up by the United Nations in 1974 to help facilitate trade in South Asia and headquartered in Tehran.
The same mechanism that has allowed the body to fill its original purpose of greasing the wheels of international trade—by letting central banks handle payments on behalf of their nations' companies—can also obscure which firms are doing business on both ends of a deal. That, the U.S. alleges, can mean firms are dealing through their central banks with blacklisted companies, such as firms owned by Iran's elite Revolutionary Guard.
The Reserve Bank of India instructed the country's lenders Monday to stop processing current-account transactions with Iran using the ACU. Last Friday, the central bank said Indian firms can't use the ACU mechanism when making payments for the import of oil or gas. While the earlier order didn't explicitly mention Iran, the Islamic republic is the only major crude exporter in the ACU.
Iran has ramped up its use of the clearinghouse by more than 50% this year compared to last year, after it advertised the clearinghouse to Iranian and Indian firms in early 2009 as a way to avoid having to use dollars for their transactions and thus "sidestep the U.S. banking system altogether."
The U.S. Treasury has regularly raised the issue with India for more than a year, according to officials briefed on the exchanges. Those conversations accelerated after President Barack Obama's visit to India in early November, when he endorsed India's bid to become a veto-wielding member of the U.N. Security Council and join the Nuclear Suppliers Group, the informal body that controls the trade in nuclear technologies.
The U.S. has been pushing allies to tighten the squeeze on Iran, whose nuclear program has aroused international fears. The U.N., the U.S. and the European Union began enacting new sanctions on Tehran in June. U.S. and European officials have said in recent weeks that they believe sanctions are exacting a growing toll on Iran.
The Iranian currency dropped nearly 10% in October, as Iranian traders scrambled to obtain dollars. Iran's largest shipping company defaulted on over $500 million in debt in recent months as international insurers have refused to underwrite their cargoes.
Still, the long-term impact of the latest step by India and other recent sanctions remains unclear.
Iran has offered no indication that it's willing to slow its nuclear program as a result of the sanctions. Some Middle East officials believe Tehran will find ways around the restrictions. Iran's abundant supplies of oil are a lure for traders around the region.
Major Indian energy companies, including Oil & Natural Gas Corp., have been exploring how to jointly develop energy resources with Iranian partners. India's Reliance Industries Ltd. was a major supplier of gasoline to Iran, which lacks sufficient refining capabilities, before the international sanctions caused the company to pull back last year.
U.S. officials have told New Delhi that Indian firms conducting transactions through the ACU run the risk of violating a law signed by Mr. Obama in July that bans international firms from doing business with 17 Iranian banks and much of Tehran's oil and gas sector, as well as the Revolutionary Guard. If Indian companies are found in violation, they could be banned from doing business in the U.S.
"This is a significant action" by India, said Stuart Levey, the Treasury Department's point man on Iran sanctions, in a statement to The Wall Street Journal Tuesday. He said the move will make clear to Indian companies that working through the ACU doesn't necessarily mean an Iranian counterpart has an international seal of approval. Attempts to contact ACU executives in Tehran were unsuccessful. Iran declined to comment through its mission at the U.N.
Statistics provided by the Clearing Union's website show that Iran's trade through the clearinghouse rose to $12.2 billion in the first 11 months of this year, from $7.8 billion in the same period in 2009. Of the more than $900 million owed Tehran through the monetary body during November, nearly $800 million comes from India, according to the ACU's website.
In January 2009, Iran's government advised local and Indian companies to use the ACU as a way of avoiding international sanctions and the U.S. banking system.
"Iranian exporters to India and Indian exporters to Iran no longer need to fret over the U.S. embargo on dollar transactions," read a January 2009 English-language report on Iran's state-owned Fars News Agency. "By resorting to the Asian Clearing Union mechanism for import-export transactions, exporters from the two countries can not only realize their receivables but also sidestep the U.S. banking system altogether."
The ACU is made up of Iran and eight South Asian nations including India. The transactions it handles are settled by the central banks of those nations. The ACU is run by a secretariat comprising officials from the nine member countries; the U.N. plays no formal role.
U.S. authorities can often track where money is going in Iran, in particular by monitoring the systems used by international banks. But if the central banks of India and Iran are standing in the middle of deals, it may be impossible to trace the money from start to finish, and that could enable blacklisted Iranian entities to do international trade, officials say.
In addition, the Asian Clearing Union transactions are often settled in the nations' local currencies, possibly providing Iranian firms a way around the U.S. Treasury Department's ban on certain Iranian entities conducting trade in U.S. dollars.
In making its announcement Monday, the Reserve Bank of India cited "the difficulties being experienced by importers/exporters" in transferring funds to and from Iran. It didn't say whether the decision was connected to concerns raised by the U.S. and other Western countries.
New Delhi is walking a difficult line in increasing pressure on Iran. India imports $11 billion of crude oil annually from Iran—about 14% of its total crude import bill, according to government statistics. Iran is India's largest crude oil supplier after Saudi Arabia.
India and Iran have worked together in the past two decades to check the Taliban in Afghanistan and Pakistan. The two have also announced ambitious port and energy projects aimed at opening up Central Asian markets and bringing additional oil and gas to the subcontinent.
Write to Jay Solomon at jay.solomon@wsj.com and Subhadip Sircar at subhadip.sircar@dowjones.com
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