India,Iran reach oil payment deal without gold

Filed 8 February 2012, 12:39 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.

India and Iran agreed a mechanism for settling oil payments that did not involve gold, setting aside reports that bullion would be used to pay for Iranian crude. Sanctions had closed the normal banking channels, and the arrangement that emerged instead routed a substantial share of payments through rupee accounts held in India, usable by Iran for Indian goods.

The gold reports had attracted attention out of proportion to their likelihood, because the volumes implied were very large. Iranian crude was a significant part of Indian imports, and settling even part of it in metal would have amounted to an official gold flow larger than most central banks' annual purchases.

Why the rupee mechanism was chosen

Because it was easier for both sides. For India, paying in its own currency avoided spending foreign exchange at a time when the current-account deficit was already the dominant economic concern, the same concern that drove the gold import duty increases. For Iran, a rupee balance was usable: India had goods Iran wanted, particularly food, pharmaceuticals and engineering products, and those categories were generally outside the sanctions perimeter.

Gold, by contrast, would have been conspicuous, logistically demanding and diplomatically exposed. Bullion movements of that scale are hard to conceal, require secure transport and vaulting on both sides, and would have invited exactly the scrutiny both parties were structuring the arrangement to avoid.

Why the story mattered anyway

It marks the point at which gold re-entered discussion as a settlement medium between states rather than as a reserve asset, a use it had largely lost. That the arrangement was considered and then rejected on practical grounds is more informative than a simple denial would have been: it shows the constraints are logistical and political rather than conceptual.

It also sits inside the Indian current-account story that dominates this archive. The same deficit that made a rupee settlement attractive was the deficit being used to justify raising gold import duty, so India was simultaneously trying to avoid spending foreign exchange on oil and to stop its citizens spending it on gold. That sequence is in India's gold import regime, and the official-reserve context in the gold section.

Settling crude in bullion was always the less likely outcome, for a reason that has little to do with politics: the quantities do not fit. A year of Iranian crude at the volumes India was taking would have required a share of world annual gold supply large enough to move the price against the buyer while the transaction was still running. A rupee mechanism moved paper instead, which is what settlement systems are for.