How will India & Iran settle payments issue?

India's central bank has said payments for trade with Iran should be settled outside the Asian Clearing Union (ACU), prompting fears in India that oil imports from the OPEC member could dry up without an alternative. Central bank officials of both countries were due to meet on Friday in Mumbai to discuss an alternative settlement mechanism to the long-standing ACU, through which central banks of eight South Asian countries plus Iran settle payments for bilateral trade. Indian officials have said that they expect a quick solution. Why did India halt settlement with Iran through the ACU? Iran already faces sanctions from the United Nations over its nuclear programme, and though the sanctions do not ban purchases of crude, Washington has been lobbying governments and companies to stop dealings with Tehran. Indian officials do not concede that US pressure was a reason for the RBI's move. Oil Secretary S Sundareshan said the ACU "is under some stress and RBI wants to make changes," and the RBI says it is an international issue. Indian oil industry sources say European banks sought details of individual transactions in order to clear ACU payments in euros and that was not possible as under the ACU mechanism, trade was totalled up and settled on a net basis every two months. However, the decision came close on the heels of the visit to India by US President Barack Obama, who endorsed India's bid for a permanent seat on the UN Security Council . Why is this a problem for Indian oil importers? Crude importers in India interpret the RBI directive to mean they must directly settle payments with Iran without routing the payment through the Reserve Bank of India. However, Iran's National Iranian Oil Co has refused to sell crude if settlement has to be done outside the ACU mechanism. The Iranian central bank has also refused to directly deal with Indian commercial banks, prompting an impasse this week. What is at stake and who is affected? India imports a hefty 400,000 barrels a day of crude, worth about $12 billion a year, from Iran, making it India's seventh largest trading partner, accounting for 3 percent of India's total trade volume. If an alternative mechanism is not found, those imports risk being disrupted and India's oil import bill could be inflated. Such a scenario might also enable India's rival China to step in and buy Iranian crude that is now shipped to India. Short term supplies will not be affected, oil industry executives in India say. What options for a solution are on the table? * Alternative currency. The two countries could agree to use the Japanese yen or another currency to settle trades through a third-country central or commercial bank. Another possibilty is to settle crude purchases in euros, through a commercial bank. Either would require Indian crude importers to get their letters of credit backed by commercial banks abroad, disclosing details of crude and other shipments to ensure that trade does not take place in goods banned under UN sanctions.