RUPEE PACT WITH IRAN ON THE ROCKS
This is an article from Business Line Paper appeared on 22nd November, 2013
Please click on the following link to read :
FOR EASY READING--SEE THE ARTICLE BELOW
LOOKING BEYOND INDO-IRAN RUPEE AGREEMENT
The Obama administration and EU for all practical purposes are moving closer to an agreement –or an interim agreement-- with Iran on its contentious nuclear program through Russian inter-mediation. Even with an interim agreement, USA and its allies will lose the moral authority of dictating others not to do business with Iran. This automatically means beginning of tapering of economic sanctions imposed on Iran. A renewed trading pattern with Iran can emerge thereafter.
India has past experience with Iran of two earlier pacts which came to definite closure abruptly. First, Kudremukh Iron Ore Company Limited (KIOCL) barter of 1976, against which Iran invested $630 million in return of Iron ore. It was abandoned in 1980 due to changed political realities. Thereafter another bilateral trade and payment mechanism –Asian Clearing Union (ACU) was terminated by RBI in December 2010 under US pressure
Under recent rupee trading agreement of February 2012 India’s UCO bank is nominated to deal with four Iranian banks for payment in 55:45 ratio of hard currency and rupees respectively. However counter pressures to deny insurance and especially shipping insurance to Iran-origin cargo is applied simultaneously by USA/EU. On 6th February 2013 USA mandated that India must trade with Iran by 100% payment in rupees for import of crude oil, to which Iran has remained defiant. With greater advancement and success in non-proliferation talks, Iran’s attitude on rupee payment arrangement may harden.
All bilateral/special trading agreements are conceived because of political and economic necessities. They survive as per the situational emergencies; and thereafter collapse without a whimper leaving many unsettled issues. Indo-Iran rupee agreement is trending towards such a sun-set state.
Pros and cons
Indo-Iranian mechanism has proved to be a blessing for Indian trade—especially exporters of Basmati rice ($2 billion), soymeal ($0.6 billion) annually. Other traditional items like tea, coffee, textiles, and pharmaceuticals have also witnessed better export prospectus. Price realization and profitability per unit is much superior when compared with other conventional markets. Corn and raw sugar export from India is also picking up though slowly.
At the same time, Indian companies are always exposed to OFAC (office of Foreign Assets Control of US) surveillance. Their non- Iranian business is under threat of being restricted by withholding of dollar/hard currency payments through the punitive actions on the banks dealing with remittance to Iran.
Iran’s exports to India peaked to $13billion in 2012-13 for supply of crude oil, urea, petroleum products, saffron, dry fruits. By April 2013, trade balance in favor of Iran was about $8 billion (Rs 432000 millions @Rs54=$). Any steep depreciation in the rupee vs dollar either due to Bernanke’s tapering off and higher twin fiscal deficits, CAD and fiscal, results in invisible loss of buying power of Iranian surplus. Since rupee has declined by about 17% (from Rs.54 to Rs 63 to a $) its value would have been 504000 millions. Loss of Iranian purchasing power is Rs 72000 millions (Rs 504000-432000=72000 millions) or 17% or $1.4 billion on $8 billion surplus. Had this amount kept in Nostro dollars/euros a/c, Iran could have shopped more by Rs 72000 millions This also implies that Iran sold crude oil cheaper by 17% to India. With imminence of US tapering, rupee may weaken more in coming months.
Iran also finds difficult to source large tonnage of “quality” wheat, corn, sugar from India. it prefers sourcing them from origins of its choice, if hard currency is amply available.
Looking beyond rupee trade
Indian trading entities in their zeal and momentum to make quick buck, forget the financial risk that may be caused by any “peaceful solution” between Iran and international community. There is no legal recourse or any procedure of winding up the rupee agreement under that eventuality. India can attempt is to seek diplomatic intervention that means rounds and rounds of “discussions” either in New Delhi or Tehran.
If trading restrictions are phased out or tapered by the US/EU, Iran will undertake business on competitive basis. Indian Basmati rice will be pitted against aromatic varieties of Thailand and Pakistan. Soy meal, corn, raw sugar will meet the challenge of South American and Black sea prices. The base of business will shift back to Dubai from Tehran. Iranian trading companies will compete with new/old private players based in Dubai. All the existing contracts will be threatened or might be renegotiated unfairly. In short, preferential treatment to India will end forthwith.
On the positive side, all international insurances will be freely available to India and Iran; OFAC will no longer pose a threat to Indian companies; surplus in UCO bank may be used for import of all type of commodities and services leading to its faster liquidation of surplus—may be with some over invoicing; agency commission may be permissible; legal jurisdiction and awards can be negotiated rather than being limited to Iranian law; enforcement of arbitration from which Iran is presently insulated will be feasible.
The way forward
The citing above is only an illustrative rather than comprehensive. However, time is ripe for the Industry Chambers to start developing a model that may assist the Deptt of Commerce, Ministry of finance and Ministry of External Affairs (MEA) for strategizing the policy frame work to deal with sun set of rupee agreement to minimize dislocation in the bilateral trade. UCO bank should also provide necessary inputs to all concerned and RBI. MEA’s role and Indian embassy in Tehran will be vital in smoothing the winding down operation of the rupee agreement with back up assistance of all concerned. Idea is to get prepared for what can be anticipated in the nearest future.