UPDATE 2-Bombing puts India's trade ties with Iran to the test
* Attack in Delhi could hurt Indian trade with Iran
* May roil India's bid for good ties with Iran and Israel
* Export credit insurance now unavailable for Iran -exporter
* India mulls boosting exports to cover Iranian oil imports (Adds deputy Israeli prime minister, paragraphs 11-13)
NEW DELHI, Feb 14 (Reuters) - India's determination to pursue trade with Iran despite Western sanctions could be undermined as wary exporters back away from fresh deals after a bomb attack in New Delhi blamed on Tehran, a trade association chief said on Tuesday.
Up to now India has not gone along with new financial sanctions imposed by the United States and European Union to punish Iran over its disputed nuclear programme. Instead, New Delhi has come up with elaborate trade and barter arrangements to pay for oil supplies.
However, the president of the All India Rice Exporters' Association said Monday's attack on the wife of an Israeli diplomat in the Indian capital will damage trade with Iran and may complicate efforts to resolve an impasse over Iranian defaults on payments for rice imports worth around $150 million.
"The attack and its political fallout have clearly vitiated the atmosphere. Traders who were already losing money due to payment defaults will be extremely wary of continuing their trade with buyers in Iran," Vijay Setia told Reuters.
"After all, no one wants to lose money or block it for that matter. With mounting tension, the ECGC will altogether stop giving insurance cover to Indian exporters," he said, referring to the state-run Export Credit Guarantee Corporation of India that covers the risk of Indian exporters selling on credit.
The head of a large New Delhi-based exporter said the ECGC was no longer covering consignments to Iran due to the risk and uncertainties involved.
"Some traders are trying for the ECGC cover even at reasonably higher premiums," said the executive, who asked not to be named due to the sensitivity of the issue. "But Monday's incident has made everyone very suspicious."
ECGC officials were not immediately available to comment.
The Commerce Ministry, which is still planning to send a large business delegation to Iran this month to explore how to boost exports, declined to comment.
Israel accused arch-enemies Iran and its Lebanese militant ally Hezbollah of being behind twin bomb attacks that targeted Israeli embassy staff in India and Georgia on Monday. Tehran has denied involvement in the attacks.
Deputy Israeli Prime Minister Dan Meridor forecast a boost to bilateral relations with India as a result of the incidents.
"India is an important country - important in the world, important to Israel. India, to my regret, did not join the sanctions against Iran," Meridor told Israel's Army Radio.
"I think that if it becomes clear that Iran, or Iranian intelligence, or Iranian-inspired Hezbollah, used India in order to carry out terrorist attacks, the diplomatic realm as well as the intelligence cooperation between Israel and India can be activated," he said, without elaborating.
India said on Tuesday it was still unsure who was behind the attack on the Israeli woman's car by a motorbike rider who attached an explosive to the rear door and fled. It has been pointedly silent on Israel's accusation that Tehran was the culprit.
"Sleeper cells of jihadi operatives could have been given the job by those behind the blast," said Anil Bhatt, a retired Indian army colonel and independent defence analyst.
The bombing took place in broad daylight some 500 metres from Prime Minister Manmohan Singh's residence, prompting accusations that security is weak in Indian cities. Just last year, 11 people were killed by a bomb at New Delhi's High Court.
New Delhi has good relations with both Iran and Israel, and so the attack makes its diplomatic balancing act between the two countries all the more difficult, and has thrust the mounting tension between the Middle East rivals onto its doorstep.
Israel is the second-largest supplier of arms to India. But India is Iran's biggest oil buyer, relying on it for about 12 percent of its needs, and it is Tehran's top supplier of rice. On the diplomatic front, India regards Iran as an important partner to protect its regional interests when U.S. troops are withdrawn from Afghanistan.
"Such security situations on our soil could complicate India's relations with Iran," said India's former foreign secretary, Kanwal Sibal.
India is considering stepping up exports of a range of goods, including wheat and rice, to settle part of its $11 billion annual oil bill to Iran. The two sides have been seeking alternative payment mechanisms to settle their trade after existing conduits have either been scrapped or become vulnerable in the face of the West's sanctions.
The payment problems have recently led Iranian buyers to default on purchases of about 200,000 tonnes of rice from India worth some $144 million.
Last week an Indian official sounded a defiant note over mounting diplomatic pressure from the United States and Europe to follow their sanctions on Iran.
"There are U.N. sanctions which India honours, those don't cover the export of a vast range of products which India can export to Iran," Trade Secretary Rahul Khullar said.
"If the EU and the U.S. both want to stop exports to that country, please tell me why I should follow suit? Why shouldn't I take up that business opportunity?"
Lisa Curtis of the Heritage Foundation's Asian Studies Center said in a column on www.reuters.com that India will find it increasingly difficult to placate both Iran, on the one hand, and the United States and Israel on the other.
"The skills of Indian strategists who seek to balance India's role as a growing global power with its need to guard against the prospect of rising regional instability will be tested in coming months as the international confrontation with Iran intensifies." (Writing by John Chalmers; Additional reporting Ratnajyoti Dutta, Satarupa Battacharjya, Matthias Williams and Dan Williams; Editing by Mark Heinrich)
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