A payments dispute between India and Iran escalated after Tehran refused to sell oil to India under New Delhi's prohibitive new rules, sources on both sides said on Wednesday.
The Indian sources said officials from the central banks of the two countries will meet on Friday as Iran seeks to rescue trade worth around $12 billion a year, at risk from rising U.S. pressure on countries trading with Iran to abandon all dealings.
Last week, the Reserve Bank of India said deals with Iran must be settled outside the Asian Clearing Union (ACU) system, used by central banks of member nations to settle bilateral trades.
Analysts predicted talks would be tough and that New Delhi may face a costly bill if it abandons Iranian oil imports.
Iran is under global pressure over its nuclear program, and though United Nations sanctions do not forbid the purchase of Iranian oil, the United States has pressed hard for governments and companies to stop dealing with Tehran.
India is the biggest buyer of Iranian crude among ACU members, with state-owned refiners and privately owned Essar Oil taking around 400,000 barrels per day.
Two Indian industry sources said on Wednesday that National Iranian Oil Co. (NIOC) had turned down Indian oil firms' request for payments outside the ACU. The ACU includes the central banks of India, Bangladesh, Maldives, Myanmar, Iran, Pakistan, Bhutan, Nepal and Sri Lanka.
"Indian firms had asked Iran to immediately nominate a bank in Europe through which payment can be made. But NIOC refused," said one of the sources.
When asked if NIOC was willing to accept any mechanism outside the ACU, a NIOC source said: "It is not acceptable to NIOC as this exercise ... (has been) in place for so many years."
Iran's central bank requested a meeting with its Indian counterpart, a Reserve Bank of India (RBI) spokesperson said, adding no date had been set.
But an oil industry source, who will take part in the meeting, said the talks would be on Friday in Mumbai.
He said India's oil ministry has suggested that RBI stick to the old mechanism of guaranteed payments for oil for now.
Ambika Sharma, Deputy Secretary General at the Federation of Indian Chambers of Commerce and Industry, said: "The two central banks could look at settling the trade transaction in a currency other than the euro and the U.S. dollar"
Indian analysts said the oil dispute was the result of U.S. pressure on the international community to stop dealing with Tehran to force it to abandon its nuclear program.
The White House on Wednesday praised the Reserve Bank of India for reducing its dealings with Iran's central bank.
"We think the Reserve Bank of India has made the right decision to carefully scrutinize and reduce its financial dealings with the Central Bank of Iran," White House spokesman Tommy Vietor said in an e-mail.
"This latest action adds to the growing list of companies, financial institutions and governments that are increasingly concerned about Iran's misuse of trade and financial relationships to support illicit activity, including its nuclear program."
Tehran says it pursues only peaceful goals and is not trying to build a nuclear bomb.
U.S. President Barack Obama visited India last month and promised to help New Delhi boost its global role, including by supporting its bid for a permanent U.N. Security Council seat.
"Iran is already struggling to place their crude in the market, and any stoppage of supply to India will further escalate the problem especially when series of sanctions are imposed on them," said Praveen Kumar, who heads consultancy FACTS Global Energy's South Asia oil and gas team.
However, India would not want to see ties fray with Tehran, which it sees as an ally in stabilizing Afghanistan after U.S. troops leave in 2014. It is also sensitive to internal criticism that the decision was taken due to U.S. pressure.
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