Fresh set of problems for India as Iran demands payment in euros

A fresh set of problems is likely to delay the handover of two terminals at Chabahar port by Iran to India. Iran has insisted that India should provide it a euro-denominated bank guarantee to operate the project. 

With international banking channels frozen with respect to Iran, it is a big challenge for India to negotiate for getting the port into commercial operations on a sustainable scale. In early September, the visiting Iranian Roads and Urban Development Minister, Abbas Ahmad Akhoundi, had told the media that he expected the handover to happen within a month. Chabahar is India’s first ever venture to run an overseas port, and has been in the works since 2003. Last week, state-owned IOCL and MRPL placed orders to buy 9 million barrels of crude from Iran, but with the condition that the payment is made in rupees. A bank guarantee in euros is impossible for India to offer since it will have to be made through a foreign bank. An official of a concerned government department said with the US sanctions in place and expected to stiffen, no bank would want to offer such a guarantee and lose access to the US market. 

The guarantee demanded by Iran is meant to underwrite the revenue share arrangement between the two. India Ports Global — the joint venture set up by JNPT and Kandla Port Trust by the Centre to build the two terminals at the port including a container one — has guaranteed a minimum handling of 30,000 TEUs by the third year of operations of the port. It aims to eventually handle cargo of 250,000 TEUs.

In the case of crude imports from Tehran from November, India expects to overcome payment problems given the currency of transaction would be rupees. UCO Bank and IDBI Bank, which have no exposure in the US market, have been identified as the channels through which the payments will be made. Petroleum Minister Dharmendra Pradhan has confirmed the development, saying India is working on an alternative payment system. 

The insistence on a euro currency guarantee is a throwback to negotiations of 2014, when Tehran told New Delhi it would no longer accept payment for gas and oil in rupees, even though it was a currency to bypass the sanctions.

The other challenge to make Chabahar operational is the availability of heavy duty equipment to furnish the ports, including gantry and shipping cranes. Indian Port Global has to buy them from vendors, most of whom will be foreign firms. In consultation with these firms, the Centre has found they are unwilling to make any supply to an Iranian destination, because of the sanctions. “Without clarity on whether there is an escape clause in the sanctions, we might have to cancel the orders if we place them now,” said another government officer. This could be costly for India. As of now, Tehran has offered to furnish the terminals with some of their surplus equipments as a transition measure, but this will not be enough to make a port operational to handle deep-sea cargo. 

One of the attractions of Chabahar is that it is a deep sea port on the Arabian Sea, unlike Banda Abbas, the other major port of Iran located in the Gulf of Hormuz. 

The types of ships that could come calling are the largest ones. Meanwhile, time is slipping through to make the port operational. India Ports Global only has a 10-year lease on the port, with effect from 2015, according to the agreement signed with Iran.