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UPDATE: India, Iran Work Out New Mechanism For Crude Payments

Tuesday, Feb 07, 2012

--Indian firms to pay for 45% of crude imports in rupees, says Iranian envoy

--Iran may increase imports of goods and machinery from India

--India may invest in exploration, infrastructure projects in Iran

(Recasts the first paragraph, adds comments from Iran ambassador in 3rd, 6th, 10th to 12th paragraphs, background and context in 4th, 5th, 7th to 9th paragraphs)

By Rakesh Sharma

Of DOW JONES NEWSWIRES

NEW DELHI (Dow Jones)--India and Iran have worked out a new arrangement for New Delhi's crude oil purchases from Tehran, as sanctions by the U.S. and European Union threaten to disrupt the current payment process via Turkey.

Under the new system, Indian companies will pay for 45% of their crude oil imports from Iran in rupees while the two countries would evolve other methods for the remaining portion, Sayed Mehdi Nabizadeh, the Islamic Republic's ambassador to India, said Tuesday.

"Both the sides are satisfied," he told reporters at the Iranian embassy.

Settling part of its crude bill in rupees would be convenient for India and could also give it negotiating power on other terms of purchase like pricing. The arrangement would also allow Iran to continue trade despite sanctions from the West.

Since the rupee isn't fully convertible and Indian exports are just a fourth of its imports from Iran, the Middle-Eastern nation would buy more products like machines and agricultural commodities from India. The South Asian nation would also invest in projects in Iran, such as oil and gas exploration and development, iron-ore extraction and laying railway tracks and roads.

"We will find the mechanism for the [non-rupee portion]. This [payments for crude] will become much easier," Nabizadeh said.

India gets about three-fourths of the crude it requires through imports, and Iran is its second-largest source after Saudi Arabia, supplying crude worth about $12 billion annually.

Since the second half of 2011, both the countries are settling crude oil payments through Turkey's Halkbank, a mechanism that is under threat as Western governments are trying to tighten the screws on Iran amid growing concern that the country is trying to develop nuclear weapons. Iran says its nuclear program is for peaceful means.

A recent U.S. law empowers its authorities to impose penalties on foreign banks dealing with the Central Bank of Iran to settle oil import payments. Monday, the White House said it was freezing all property owned in the U.S. by Iran or its central bank. The EU has also approved an embargo on Iranian oil that goes into effect in July.

Nabizadeh also said that Iran's central bank has opened accounts in Indian banks, including UCO Bank Ltd. (532505.BY), to settle payments.

He said India has cleared all bills for last year, and future payments will be settled through the new mechanism. He added that media reports on settling payments in gold weren't true as "gold is not a suitable procedure."

Despite sanctions and pressure on crude trade, Iran won't give any concession to India on supplies, Nabizadeh said.

- By Rakesh Sharma, Dow Jones Newswires; +91-11-4356-3334; rakesh.sharma@dowjones.com

(END) Dow Jones Newswires

07-02-12 1041GMT