By Richard Mably
LONDON, April 22 (Reuters) - Britain has blocked efforts byoil major Royal Dutch Shell to settle a $2.3 billiondebt it owes Iran by paying in kind with grains orpharmaceuticals, industry sources said.
Shell has been trying for months to find a way to workaround international sanctions that prevent it paying incurrency for crude it bought from the National Iranian OilCompany before a European Union embargo on Iran that startedlast July.
The sources said the British government was reluctant toprovide relief for the Iranian economy when Western powers areusing sanctions to apply financial pressure on Tehran todismantle its nuclear programme.
"The view is that doesn't make sense to smooth the way for apayment that helps Iran when government is trying to press Iranto negotiate," said an industry source.
A government spokesman declined comment on the Shell casebut said: "The government fully backs the tough regime of EUsanctions that have been put in place against Iran."
Talks earlier this month between Iran and six world powersincluding Britain failed to make progress in resolving adecade-old dispute around Iran's nuclear progress. Another roundof negotiations has been scheduled for May 21.
The industry sources said Shell in February explored withthe British government the possibility of asking Britishpharmaceuticals maker GSK to deliver medicines to Iranin a payment-in-kind deal known as an offset agreement.
GSK said it had not been approached or held any discussionson the matter. Shell declined comment.
In October, the Anglo-Dutch oil company sought permissionfor an offset agreement that would have seen U.S. agriculturaltrader Cargill deliver grain to Iran.
Following publication by Reuters, Dutch foreign ministerFrans Timmermans in a letter to parliament acknowledged theproposal, saying: "As in all sanctions regimes there are somecarefully defined exceptions applicable for which in certaincases an exemption can be granted by national governments."
Meetings were held with Cargill but, said the industrysources, the proposal was turned down by the British government.Cargill and Shell both declined comment at the time.
MAINTAINING IRAN RELATIONSHIP
The sources said the oil company wanted to repay its debt toNIOC to maintain cordial relations with Iran, one of the biggestproducers in the Organization of the Petroleum ExportingCountries.
"Politics come and go but it's in the interests of Shell andits shareholders to pay its debts and maintain a relationshipwith a leading oil producer like Iran," said one of the sources.
Shell revealed in a March filing to U.S. regulatoryauthorities that it owed Tehran $2.3 billion and made a net lossof $6 million trading Iranian oil in 2012. Unlike its rivals,Shell continued trading with Iran under a provision forpre-existing contracts close to the EU's June 30 deadline beforethe embargo. The debt is for oil purchased in 2011 and 2012.
Iran's oil revenues have fallen by about 50 percent sincesanctions were imposed last year, and regional economistsbelieve it has been forced to draw on its foreign reserves tohelp buy essentials like grains.
But with an estimated $100 billion of foreign reserves atthe start of 2012, thanks to high oil prices, the Iranianeconomy is far from collapse.
The International Monetary Fund said last week that whilesanctions had frozen Iran out of the international bankingsystem, Tehran was avoiding a balance-of-payments crisis andshould emerge from recession in 2014.
Food and medicine are among the humanitarian goods notbarred by U.S. and European sanctions but, isolated frominternational banking, Iran has been forced to pay a premium forgrain imports.
Washington has tried to restrict countries like China,India, South Korea and Japan that still buy Iranian oil topaying for shipments by the barter of approved goods - includingfood and medicine.
U.S. sanctions state that funds used to pay for oil mustremain in a bank account in the purchasing country and can beused only for non-sanctioned, bilateral trade between thatcountry and Iran. Any bank that repatriates the money ortransfers it to a third country faces a U.S. sanction risk.
Nevertheless, said the industry sources, it appears theBritish government would rather Iran be obliged to spend foreignreserves or use oil revenues to barter for essential importsthan benefit from shipments of humanitarian goods paid for byShell debt.