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India is using euros to clear most of its purchases of Iranian oil through a Turkish bank because of hurdles in making rupee payments, according to three people with knowledge of the transactions.

While some payments have been made in rupees, they are more difficult after India barred Tehran-based Parsian Bank from opening a branch in Mumbai and because the rupee can’t be directly converted overseas to other currencies, the people said, asking not to be identified because the information is confidential.

The euro payments are continuing even as the U.S. and the European Union seek to limit oil revenue in Iran, which they say is developing nuclear weapons. The payments also mean Iran won’t be handicapped by difficulties in converting rupees, the worst performer among Asian currencies over the past 12 months.

“If the Indian companies need to buy the euro, then this would be a negative for the rupee, especially if the payments are large,” said Chin Loo Thio, a senior analyst at BNP Paribas SA in Singapore. India imported about $9.4 billion worth of oil from Iran in the year ended March 2011, according to data from India’s Department of Commerce.

The Indian rupee weakened 0.9 percent to 54.98 per dollar as of 12:37 p.m. in Mumbai, the biggest drop in almost two weeks, according to data compiled by Bloomberg.

Global Sanctions

The international measures against Iran include an EU ban on its crude exports, which became effective on July 1. A law enacted Dec. 31 cuts off international banks from the U.S. financial system if they settle Iranian oil trades.

India and Turkey received exemptions from the U.S. financial restrictions after they cut crude imports from Iran. That allowed the South Asian nation to continue routing payments through Ankara-based Turkiye Halk Bankasi AS, the people said. Before getting the exemptions, the Turkish lender told Indian refiners it may no longer be able to act as an intermediary when European sanctions take effect, four people with knowledge of the matter said Jan. 10.

Officials at Halk Bank in Ankara declined to comment. R.C. Joshi, a New Delhi-based spokesman for India’s oil ministry, didn’t return two calls to his mobile phone. Mohsen Qamsari, the head of international affairs for National Iranian Oil Co., didn’t immediately return a phone call to his office in Tehran.

Import Cuts

India will cut crude purchases from Iran by 11 percent in the year that began April 1 to 15.5 million metric tons as the nation seeks to diversify its supply sources, Junior Oil Minister R.P.N. Singh said on May 15. The planned reduction followed U.S. Secretary of State Hillary Clinton’s visit to New Delhi earlier in the month. She urged India to cut oil imports from Iran and said U.S. officials will help the nation find alternative sources.

Indian processors using the Islamic Republic’s crude are receiving shipments through Iranian tankers on a cost-insurance-and-freight basis, two of the people said. This means Iran is responsible for delivering the crude to the South Asian nation.

The EU ban on the purchase, transportation, financing and insurance of Iranian oil affects Asian importers because 95 percent of the world’s tankers are insured by the 13 members of the London-based International Group of P&I Clubs. That means fewer ships may be available to load the cargoes from the Organization of Petroleum Exporting Countries’ second-largest producer.

Rupee Difficulties

India’s rupee has weakened 19 percent against the U.S. dollar in the past year, according to data compiled by Bloomberg. It is also the only Asian currency to drop against the euro in the same period, sliding 7 percent.

UCO Bank, an Indian government-run lender, has been approved for taking deposits of as much as 45 percent of refiners’ crude payments in rupees, which will then be transferred to Iran.

A Mumbai branch for Iran’s Parsian Bank would have made such transactions easier, two people with knowledge of the matter said May 7. India barred the lender from opening a branch in the country because of U.S. pressure, they said.

While India proposed paying for oil in rupees, Iranian officials sought partial payment in yen because they are concerned that they may not get sufficient value from the currency, three people with knowledge of the talks said Jan. 23.

Iran’s economy has deteriorated as international measures against the nation were announced. Its currency has weakened, pushing up costs that were already surging after the government started removing energy and food subsidies a year and a half ago. Inflation accelerated to 22.2 percent in the 12 months ended May 20, the central bank said June 9.

Oil for August delivery slid as much as $1.16 to $86.50 a barrel in electronic trading today on the New York Mercantile Exchange. Prices are down 12 percent this year.

(Updates with analyst comment in fourth paragraph.)