February 5, 2012 / 11:33 AM / 7 years ago

REFILE-Sri Lanka may drop dollar to meet Iran oil sanctions

(Refiles with correct date)

* Sri Lanka may use Indian, Sri Lanka rupees

* Sri Lanka heavily reliant on Iranian crude

* India in talks to upgrade Sri Lanka refinery

By C. Bryson Hull

COLOMBO, Feb 5 (Reuters) - Sri Lanka may avoid a costly squeeze by the United States sanctions on Iranian crude by purchasing it in a currency other than dollars, following India’s lead, officials said on Sunday.

The Indian Ocean island nation is facing the most potential collateral damage from the sanctions, which are meant to cut off the dollars Washington believes are being used to fund Iran’s nuclear ambitions.

Sri Lanka imports 93 percent of its oil from Iran, OPEC’s second biggest producer, and its sole refinery, the 50,000 barrel-per-day Sapugaskanda plant, can only refine Iranian crude and three or four others that are in short supply.

U.S. Deputy Assistant Secretary of the Treasury for Terrorist Financing, Luke Bronin, flew in for a one-day visit on Thursday to meet a host of government officials to explain the options available and the impact on Sri Lanka.

A senior government official directly involved in Sri Lanka’s payments to Iran who met with Bronin said he offered a potential solution.

“I don’t know whether it was deliberate or it was accidental, but he said they are only concerned about transactions done in dollars, so that was a hint to us,” the official told Reuters on condition of anonymity.

Sri Lanka’s central bank pays its Iranian counterpart on behalf of the state-owned Ceylon Petroleum Corporation through the Asian Clearing Union (ACU), a nine-nation trade clearing house set up in Tehran in 1974.

The ACU method would run afoul of the sanctions, which were signed into law on Dec. 31 and are due to take effect after a six-month deadline. India already ruled out the ACU last year.

ANYTHING BUT DOLLARS

The fact the United States appears only to be concerned with dollars opens up an opportunity for Sri Lanka to follow India’s lead. India is considering rupee-denominated transactions and other similar options to pay for its Iranian crude needs.

“It gives us the option of doing it in Indian rupees or some other currency, although we would prefer to do it in Sri Lankan rupees,” the official said.

President Mahinda Rajapaksa last week complained Sri Lanka and other small nations were being unfairly squeezed in a fight not of their making, and said he had asked his officials to find out what alternatives the United States could offer.

A U.S. official speaking on condition of anonymity said the United States was mainly concerned with dollar transactions, and had not attempted to extract a political price from Sri Lanka, which is separately under pressure from Washington over war crimes allegations and the slow pace of reconciliation following the end of its civil war.

“The point is to try and choke some dollars off, so we want to know what the Sri Lankan government is going to do in terms of a workaround,” a U.S. embassy official told Reuters on condition of anonymity. “At least they are trying, so that’s good.”

Bronin declined to speak to a Reuters reporter on Thursday.

“He came to explain the act, the meaning of the act and what options are available to us,” Foreign Secretary Karunaratne Amunugama told Reuters. “We are aware of the seriousness of the act, and government agencies are discussing what options we could take.”

Sri Lanka has already said it was looking at buying crude from Oman and Saudi Arabia, both of whom can supply something the Sapugaskanda refinery can handle. The possibility of a waiver from the United States, which requires a demonstration of lessened ties with Iran, is also under consideration.

Meanwhile, an Indian petroleum ministry delegation visited on Friday and expressed formal interest in taking over the upgrade of the Sapugaskanda refinery.

“We already have interests here with Lanka Indian Oil Corporation, so it would fit in that context, and a technical-level team will be coming,” an Indian diplomat told Reuters on condition of anonymity.

Iran had initially proposed a $2 billion upgrade, but it fell apart when the government was unable or unwilling to contribute $500 million to it. (Additional reporting by Ranga Sirilal; Editing by Will Waterman)

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