We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Rupee Diplomacy

24 January 2012 By Jeff Glekin

Beggars can’t be choosers. Iran would prefer to sell its oil for dollars, but sanctions mean it might have to take rupees from India, its second largest customer.

New Delhi objects to sanctions on Iran on political grounds – it is willing to follow the United Nations, not the United States. But about 12 percent of India’s oil currently comes from Iran. That gives it good economic reasons for dealing with the increasingly isolated Islamic Republic.

A discount to the market price of oil, which accounts for two-thirds of India’s import bill, would be welcome. Lower prices help corporate profits and reduce the government’s subsidy bill. And this is no time for New Delhi to play nice, not with expected GDP growth this year revised down to 7 percent and the fiscal deficit ready to breach 6 percent of GDP.

As desperate as India may be, Iran is in an even worse fix. If it lost India as a customer, it would be forced to rely even more on the Chinese to mop up its production. Chinese oil majors are tougher negotiators than their smaller Indian counterparts. So Iran’s negotiating position is weak.

Plan A is for India to continue to pay in dollars, using a Turkish bank as an intermediary. But if that falls through, plan B could involve payment in rupees. Iran would prefer Japanese yen, which can be spent everywhere. India is balking. So Iran could end up with a big slug of hard-to-convert rupees. Its annual trade surplus with India was $10 billion in 2011 – that comes to a whole lot of rice and tea, or Indian assets.

India stands to gain twice, in cheap oil and a captive customer. But diplomatically it could be too clever by half. Although India could argue that the Iranians are still feeling the pinch of sanctions and being forced to hold a currency they don’t want, that’s not likely to convince, especially when India gets all the upside. And U.N. sanctions on Iran could void the whole deal – leaving India sore and scrambling for oil.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)