- INDIA-IRAN TRADE SUSTAINED DESPITE USA SANCTIONS.
- Export of basmati rice and steel plates thrive; third country trade may be strengthened.
- India –Russia too can have structured rupee trade.
- FINANCIAL EXPRESS 03.03.2015
Despite economic sanctions of the world powers (P5+1) against Iran, continued dithering over Iran –US nuclear deal and given the fact that Indo-Iran trade has seen its ups and downs (see chart), there is ample evidence of two countries having maintained its tempo by conceptualizing creative barter mechanism through “Structured Bilateral Trade”.
The two way commerce has remained around $14-$15 billion despite sanctions. The credit goes to Governments and the bankers/ financial institutions for introduction of rupee trade, dealing with insurance cover of ships, sustaining export of novel variety of Basmati rice, greater emphasis in Iron-Steel items and the latest attempt to undertake third country deals of permissible commodities.
Since 2011-12 Indian exports have climbed up by 90% from $2.4 billion to $4.5 billion while imports are down by 28% from $13.8 billion to $10 billion. Crude oil constitutes 85%-90% of Indian import from Iran. Pakistan has also been chasing Iran for a similar structured bilateral trade but without any success.
Source-deptt of commerce
The first notable instrumentality is the agreement of 2011-12 under which import of crude oil to India was conceived for payment in 55:45 ratios of hard currency and Indian rupees respectively. This policy generated substantive rupee reserves with nominated lead bank from Indian side, UCO bank (United Commercial Bank), for the disbursement of export proceeds, free from any fear of financial sanctions. After initial hiccups, payment mechanism is fairly smoothened between the two sides.
Another novel development that transpired was preference accorded by Iran in selecting the best hybrid variety of Pusa Basmati 1121 rice developed by IARI (Indian Agriculture Research Institute) with exceptional grain length of 8.3 mm vs other assortments of basmati and non- basmati rice having grain lengths of 6 to 7.5 mm. Even Thai Hom Mali rice (fragrant rice) cannot match its characteristics. It has very high kernel elongation ratio. On cooking it expands by 2-2.5 times- to about 20mm, does not turn sticky, and is aromatic. Though developed by IARI in 2005-06, its commercial exploitation bloomed and peaked when Iranian buyers lapped on to it.
Its export to Iran spiked from 0.6 million tons ( $ 595 million) to 1.44 mill tons ($1835 million) in preceding three years and Iranian market captured 37% share of total Basmati exports of 2013-14. Per unit value of rice, like all other commodities, is down by about $300/mt this year which will be reflected in estimates of 2014-15. In the horizon of last 4-5 years, Indian farmers and rice exporters have derived tremendous benefit from the R&D of IARI. 1121 variety and its subsequent up-gradation as 1509 are also getting greater recognition in other traditional markets of Saudi Arabia, Yemen etc.
During visit of a rice delegation to Iran in first week of February2015, , Indian side is further assured of purchase of one million tons rice in Iranian new year Navroz commencing around 21st March. For ensuring acceptable quality/ quantity of rice, procedure of Good Manufacturing Practices (GMP) notified by APEDA to continue under which counterparties (sellers/Buyers) will be pre-approved by Iranian authorities. So far about 64 such counter parties are operating and further registration is allowed. Per unit value of rice, like all other commodities, is down by about $300/mt this year which will be reflected in estimates of 2014-15.
There have also been short term profitable opportunities in shipping out soymeal, rapeseed meal and raw sugar etc. which have now disappeared due to disparity in international values.
IRON & STEEL EXPORTS
Export of Iron and steel items has flourished from $203 million in 2011-12 and expected to touch $500 million in 2014-15. Media reports indicate that this smart deal for supply of steel plates is also uniquely designed between NIOC (National Iranian Oil Corporation), its affiliate IGEDC (Iranian Gas Engineering Development Corporation) on one side, and Essar Steel acting on behalf of Essar Oil by fronting STC as the prime exporter on the other side.
Essar has approached Indian government to free it from paying its share of oil dues to Iran, and instead offset them against a $2.5 billion deal to supply steel plate to a NIOC affiliate. (Reuters report 28/11/2014 http://goo.gl/qKJrPu ). Such barter or counter trade deals may be encouraged specially through public sector trading enterprises of two nations for avoidance of any allegation of proliferation of these plates to non-intended applications.
THIRD COUNTRY TRADE
There is a consensus emerging within Indian Government to facilitate Iran’s long standing demand of merchant trading of buying food stuff, pharma and medical equipment from third countries. These could be paid in dollars/euros to supplier’s country by the Indian side and debit equivalent rupees in the account maintained by UCO bank.
Iran requires palm oil, soy oil, corn, and raw sugar –the food items-- from third countries, like Indonesia, Malaysia, Brazil, and Argentina etc. The proposal under consideration is to authorize UCO bank to debit $100 million (Rs 620 crores) per month or Rs 7440 crores per annum out of about $4 billion (Rs 25000 crores) currently lying in Indo-Iran rupee account.
There have been concerns of over invoicing and value addition. These can be taken care of by supervisory frame work, but what is not feasible is the RBI requirement that goods must touch/enter Indian shores first to qualify for re--shipment to Iran. This insistence is totally uncalled for because all food, pharma and medical equipment are not debarred under sanctions by USA/ UN or group of P5+1 and these are freely being imported by them from above mentioned origins. Moreover double freight and port costs will render third country trade absolutely unviable and impractical. For constructive business such conditionality should be totally dispensed.
A detailed procedure should be notified by RBI/UCO bank as to how a permissible transaction will be monitored and documentation required in the letters of credits—one that is to be opened by the Iranian buyer on the Indian supplier and the other that is to be established by Indian entity on third country counter party.
Like Iran, Russia too is under western sanctions. Should there be continuation of sub-optimal values of crude oil over an extended period, squeeze in their FX reserves and rouble snapping to new lows, Russia too could be willing for a rupee account structure like Iran. Getting defence items and crude oil under rupees from Russia would be a bonanza for India. Why not be ready for another creative deal?? It will also make rupee a “well traded” currency