Govt taps Uco Bank to manage payments for Nayara Energy after EU sanctions

State-run Uco Bank has been cleared by the government to handle trade payments for Nayara Energy, The Economic Times reported on Tuesday. This comes after the refiner was cut off by both domestic and international financial institutions following sanctions imposed by the European Union.

What's the latest

Senior executives from Uco Bank met top officials at the finance ministry, who asked the lender to take the lead in executing Nayara’s transactions, the report said. Uco Bank was reportedly chosen because of its past role in facilitating oil trades with Iran, another country targeted by international sanctions.

The mid-sized state-owned bank is expected to provide Nayara with a critical channel to keep its operations running. However, operational details, such as the choice of currency, are still being worked out, the report said.

Why it matters

Nayara Energy, part-owned by Russian oil giant Rosneft PJSC, accounts for about 8 per cent of India’s refining capacity and 7 per cent of its retail fuel network. Therefore, keeping its operations running is key to India’s energy security.

How we got here

The EU sanctioned Nayara in July this year because of its ties to Russian oil giant Rosneft, which owns just over 49 per cent of the company.

Since then, the company has faced mounting challenges. Major lenders, including the State Bank of India, have stopped processing their trade and foreign currency transactions, wary of Western reprisals that could threaten their access to the global financial system.

As a result, Nayara has had to cut refinery runs and even demand advance payments from buyers. Last month, Nayara asked the government to help in securing vessels after local shipowners stopped working with the company.

Bottom line

Western sanctions on Russian-linked companies are having a ripple effect across global markets. Amid this, India is trying to balance compliance risks with its need to secure its own energy supplies.