In a reflection of shifting loyalties, India, who had long termed Iran a 'natural partner,' now joined hands with the U.S. on sanctions against the former over its nuclear ambitions.

India's central bank, Reserve Bank of India, told its banks to stop processing transactions with Iran through the Asian Clearing Union.

The bank added that Indian firms cannot use the ACU to make payments for the import of oil or gas. However, the bank allows for trade with Iran in currencies other than the dollar and euro or settles transactions outside the ACU.

The ACU was set up by the United Nation in 1974 to facilitate trade in South Asia. The clearinghouse, which is based in Tehran, settles trade transactions for Bangladesh, Bhutan, Iran, India, Nepal, Pakistan, Maldives, Mynamar and Sri Lanka through their central banks.

India has been Iran's biggest trade partner in the South Asian region. India's support for the sanction has serious consequences for the Middle Eastern country, including affecting their oil revenues.

Petroleum industry sources said that the change notified by RBI could hurt their imports, as it would force the National Iranian Oil Co (NIOC) and Indian firms to find a common platform, maybe a European bank, for settling trade, instead of the central banks, Business Standard said in a report.

Iran is the only crude oil exporter using the ACU, while India is the biggest importer among them.

Experts believe it would be difficult to find an alternative bank to facilitate further trade between the two countries for oil exports. There are also fears that the U.S. could impose sanctions or blacklist companies that continue to help Iran.

The U.S. Treasury Department in September imposed sanctions on Tehran-owned European-Iranian Trade Bank AG, called EIH Bank in Germany, for facilitating billions of dollars of transactions with Iranian banks that the US and the EU have blacklisted for aiding Iran's nuclear or missile programs, the Business Standard reported.

The U.S. and Europe imposed sanctions against Iran, who has been trying to maintain to enrich its uranium supply.

Iran signed the nuclear non-proliferation treaty (NPT) in 1968 and ratified it in 1970. However, the country has been found violating several of rules of the NPT, including secretly enriching its uranium supply for 18 years, an important component for nuclear weapons.

The UN's Security Council ordered the country to stop all enrichment activities till its peaceful intentions could be fully established. But Iran has been protesting that it has the right to enrich uranium to be used as fuel for civil nuclear power and has denied making nuclear weapons.

The first set of trade sanctions was imposed by the U.S. in 1979. In June 2010, the UN Security Council imposed a fourth round of sanctions, while the U.S. and EU imposed additional restrictions.


India and Iran have long been good trade partners in the Asian region.

The South Asian country has been one of the constant supporters of Iran's nuclear programs.

 India's Foreign Secretary Nirupama Rao had stated in November that India supports Iran's right to peaceful use of nuclear energy.

Some of that could be because of India's own standoff with the U.S. regarding its nuclear program. The country has remained steady in its refusal to sign the NPT, as it believes the treaty would create a club of nuclear haves and have-nots.

India did support sanctions against Iran in 2006, but has since remained positive towards the latter as it felt neglected by the U.S. after it voted for the sanctions.

Indo-U.S. relationship has, however, improved since then, with the latest three-day visit by President Obama to India in November, where he back India's bid for a permanent seat on the UNSC.

Iran has ramped up its use of the ACU clearinghouse by more than 50 percent this year compared to last year, after it advertised the clearinghouse to Iranian and Indian firms  in early 2009 as a way to avoid having to use dollars for their transactions, thus sidestep the U.S. banking system altogether, the Wall Street Journal reported.

The U.S. Treasury has long been pressuring India to support the sanctions. After President Obama's visit to India in November, conversations between the Treasury and India increased.

U.S. officials also told India that Indian firms conducting transactions through the ACU run the risk of violating a law signed by Mr. Obama in July that bans international firms from doing business with 17 Iranian banks and much of Tehran's oil and gas sector, as well as the Revolutionary Guard. If Indian companies are found in violation, they could be banned from doing business in the U.S., WSJ reported.

Several India companies such as Reliance Industries and ONGC had been planning oil business ties with Iran.

The RBI did not state if its latest decision was related to issues raised by the U.S. and EU on these concerns.

Comments from Iran's Supreme leader Ali Khamenei in November asking Muslims worldwide to support the Kashmiri people in India's Jammu and Kashmir state, also offended leaders in the South Asian nation.

J&K, which has a Muslim-majority population, has been facing insurgency issues, and has long been a sore point of contention between Pakistan and India. India has often accused its neighbor, Pakistan of supporting insurgency activities in the region.

India regarded Iran's comments as disregard for its sensitivities and questions against its territorial sovereignty.