India and Iran Agreed to Set up a Mechanism for Payment of Crude Oil

India and Iran on 5 October 2011 agreed to set up a mechanism for payment of crude oil and ensure bilateral trade.  Both sides agreed that the mechanism will cover the payment to Indian exporters and some other areas. The two countries have decided to continue their dialogue on the issue. Earlier, Iran had threatened to stop crude oil supplies to India if a mechanism to pay for imports is not found quickly. India has to pay Iran 9 billion dollars, which is now seven months in arrears.

Iran is second only to Saudi Arabia as an oil supplier to India, while India is Iran's second-biggest crude buyer after China, accounting for about 20 per cent of its exports. India imports 40000 barrels of oil from Iran on daily basis. Nearly 12 percent of India's oil demand is met by oil supply from Iran. Indian firms are finding it difficult to pay Iran because of international sanctions imposed over Iran's controversial nuclear programme. The sanctions include banking restrictions.

TThe problem over payment to Iran happened after the Reserve Bank of India on 23 December 2010 scrapped the Asian Clearing Union (ACU). As an alternative to Asian Clearing Union, India tried to make payments through countries like the UAE, Turkey and Russia. However, these nations had objections to routing big amount of 13 billion dollars which India pays for Iranian oil annually. They wanted to route small payment upto 6-7 million dollars.

MMangalore Refinery and Petrochemicals-a susidiary of ONGC- is the biggest consumer of Iranian crude in India.