New US senate bill could hit Asian buyers of Iranian crude: sources

Tokyo (Platts)--9May2013/909 am EDT/1309 GMT

A new bill introduced late Wednesday to the US Senate aimed at strengthening Washington's sanctions against Iran could affect Asian countries that pay for Iranian crude in foreign currencies, sources familiar with the matter said Thursday.

The potential impact on Iran's main buyers of crude -- China, Japan, India, South Korea and Taiwan -- is not altogether clear, though some refiners have paid in the past for Iranian oil in currencies that are not the countries' own.

The Iran Sanctions Loophole Elimination Act aims to block Iran's access to billions of dollars worth of foreign exchange reserves and limit the ability of designated Iranian entities like the Central Bank of Iran (CBI) and the National Iranian Oil Company (NIOC) to conduct transactions in foreign currencies, including euros.

With immediate effect, it would require the US president to impose sanctions on any foreign bank that "knowingly conducts or facilitates a transaction in a non-local currency for or on behalf of the CBI or any entity within the blacklisted Iranian energy, shipping, shipbuilding and port operator sectors."

Under the legislation, currency conversions would be prohibited effective Thursday, May 9, and any transactions conducted from that day forward would retroactively be subject to sanctions when the legislation becomes law, according to the bill introduced by Republican Senators Mark Kirk of Illinois, Susan Collins of Maine and John Cornyn of Texas and Democratic Senators Joe Manchin of West Virginia and Bill Nelson of Florida.

The senators said a Chinese bank, for example, would be prohibited from conducting a transaction with a European bank in euros -- such a transaction would only be allowed to be done in yuan.

"We are putting financial institutions around the world on notice that you must halt all foreign currency transactions on behalf of blacklisted Iranian banks and sectors or risk being cut off from the US financial market," the senators said.

"If you are facilitating a transaction for the CBI, NIOC or a host of other blacklisted Iranian companies, and the transaction is not being conducted in your local country's currency, you will be held accountable."

POTENTIAL IMPACT

The possible impact on China is unclear as Beijing is thought to have set up its own currency exchange system with Iran to facilitate bilateral trade, including for oil, via their respective central banks.

There has also been suggestion that some barter trade is taking place between Beijing and Tehran.

Japan and South Korea, meanwhile, have been paying for Iranian crude with their own currencies, the yen and won, so are unlikely to be impacted by the bill in its current form, sources said Thursday.

But Tokyo and Seoul will still closely watch what final form the legislation may take, sources said.

Japanese refiners make their payments for Iranian crude directly into an account held by Iran's CBI at Japanese banks, sources said.

In South Korea, the situation is a little more complex.

Refiners place their payments for Iranian crude into a won-denominated account held by the CBI in South Korea.

Iran then uses that money to pay for imports of other South Korean goods, meaning no Korean currency actually ever leaves the country.

India, meanwhile, agreed with Iran last year to settle 45% of oil payments in Indian rupees and the rest in euros.

Payments in euros were settled through Turkey's Halk Bank.

But in February, the Turkish bank said it would not be able to process any more Iranian payments, so Indian refiners confirmed that all payments were now being made in Indian currency.

UCO Bank, a domestic bank headquartered in Kolkota, was chosen to make rupee payments to Iran and a waiver on tax payments for these transactions was cleared last year.

Taiwan, for its part, has only periodically bought Iranian crude in the past year.

It first stopped Iranian crude imports in April 2012, two months before sanctions were imposed by the US and EU on trade with Iran.

It was subsequently granted a sanctions waiver by Washington and this was renewed in early December for a further 180 days.

Taiwan resumed Iranian crude purchases at the end of last year, with 3.9 million barrels imported over November and December 2012.

Latest available government data as of February 2013 show no new imports from Iran since then.

A source at a Taiwanese refiner said its crude imports from Iran were previously paid for in Japanese yen and Taiwanese and US dollars but he was now uncertain how payments would be made going forward.

--Takeo Kumagai, takeo.kumagai@platts.com; Daniel Colover, daniel.colover@platts.com; Song Yen Ling, yen.ling.song@platts.com; M.C. Vaijayanthi, newsdesk@platts.com; Charles Lee, newsdesk@platts.com

--Edited by Stuart Elliott, stuart.elliott@platts.com

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