India Defies Sanctions, Won't Cut Iran Oil Imports

India has joined China in saying it will not cut back on oil imports from
Iran, despite stiff new U.S. and European sanctions designed to pressure
Tehran over its nuclear program.

"It is not possible for India to take any decision to reduce the import from
Iran drastically because, after all, the countries which can provide the
requirement of the emerging economy, Iran is an important country among
them," India's finance minister Pranab Mukherjee told reporters Sunday in
Chicago.

India and China together accounted for 34 percent of Iran's oil exports from
January to September of 2011 - slightly more than Europe, according to
International Energy Agency data.

The move is likely to be seen as a political victory in Iran, but it's
unclear how Chinese and Indian companies will actually be able to pay for
Iranian oil without running afoul of the sanctions, analysts said.

"It's a blow," said David Hartwell, senior Middle East analyst at IHS
Jane's, adding that Iran may have discounted prices to keep the Chinese and
Indians on their side. "If you have two major countries like India and China
saying they will not abide by the sanctions, that's going to keep a vital
line open for the Iranians to continue to sidestep the sanctions and get
foreign capital."

He said India and China could just be trying to buy time to diversify their
oil supplies and may steer away from Iran, especially if Saudi Arabia -
India's largest source of oil imports - were to ramp up production and offer
an attractively priced alternative.

The European Union last week imposed an oil embargo against Iran and froze
the assets of its central bank. In December, the U.S. said it would bar
financial institutions from the U.S. market if they do business with Iran's
central bank.

India and China are ravenous energy consumers and rely heavily on imported
oil. Iranian oil accounts for 9 percent of India's oil consumption and 6
percent of China's, according to the latest data from the IEA.

Iran exports 2.5 million barrels of oil per day, about 3 percent of world
supplies. About 500,000 barrels go to Europe and most of the rest goes to
China, India, Japan and South Korea.

China has called for negotiations over Iran's nuclear program. South Korea
has been noncommittal about the sanctions, and Japan is seeking an
exemption, saying its Iranian oil imports have steadily declined and
probably will continue to do so.

Kyodo News agency reported that senior Japanese and U.S. officials on
Thursday will hold their second meeting on the sanctions this month.

"I believe it may not be easy to come to a conclusion on this matter in the
upcoming discussions," Foreign Minister Koichiro Gemba said.

Western sanctions could make it harder for India to pay for the oil it gets
from Iran. Past sanctions have already delayed payments by Indian oil
importers, who have had to scramble to find banks willing to handle
transactions with Iran.

India's central bank governor D. Subbarao said last week that the current
payment mechanism was "working fine," though India was also "exploring other
options," which he declined to discuss.

Indian companies now reportedly route payments through Turkey's Turkiye Halk
Bankasi AS, after EU pressure forced German-based Europaisch-Iranische
Handelsbank AG to stop handling the payments last year.

IHS Jane's energy analyst Catherine Hunter said Turkey is unlikely to shut
down that route immediately, noting that Turkish oil refiner Tupras also
uses this payment mechanism.

"But this route remains susceptible to external pressure," she added by
email. "India is now discussing rupee based payments and direct trade -
however that has a number of drawbacks for Iran given the trade imbalance
and restrictions on use. China isn't publicly discussing options but I
imagine other currency payments are also on the cards there."

The U.S. and its allies believe Iran is using oil revenues to develop
nuclear weapons, but Tehran insists its nuclear program is purely for
peaceful purposes.