TRADING WITH IRAN BY INDIA—TWO STEPS FORWARD AND TWO BACK

BUSINESS LINE 16.04.2015

POST SANCTION TRADING WITH IRAN BY INDIA—TWO STEPS FORWARD AND TWO BACK

Tejinder Narang

Iran -USA nuclear deal, expected to be concluded end June 2015, should pave the way for free trade. This will end relatively preferential treatment accorded to India under Indo-Iran rupee payment agreement.  Usage of this rupee account will be need based and will not remain a pressure point on Iran.  A way may also be found by Iran to repatriate the balance in rupee account in hard currency after sanctions are lifted.

Historically Indo- Iran trade has survived on innovative basis that goes through the metamorphosis after a few years leaving many issue unresolved. 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. Export of Non- Basmati rice and wheat in 1994 -95 was done under ACU.

Thereafter Dubai route emerged very strongly. In February 2012 India’s UCO bank is nominated to deal with four Iranian banks for payment in 55:45 ratios of hard currency and rupees respectively.

Year	2009-2010	2010-2011	2011-2012	2012-2013	2013-2014
EXPORT $ bill	1,853	2,493	2,411	3,351	4,971
IMPORT $ bill	11,541	10,928	13,790	11,594	10,307

The above chart shows a very significant declining trend in major Indian commodities after US-Iran “interim” agreement was signed in Nov 2013. This is not a matter of conjecture but reflected by facts on ground.

Basmati export to Iran flourished during initial years (2012-13 and 20113-14) by relying upon three major buyers. But in last 18 months some of the suppliers have their deemed profits wiped out and got terrible drubbing in their balance sheets. The same is true with oil meal exports. Not only money made in some bargains was lost subsequently –India abondoned important traditional markets of meals due to value distortion created by high priced exports to Iran.

 Raw sugar export was somewhat workable at lower volumes in 2014 but no repeat business followed. GOI made persistence efforts for wheat export for relaxation of Karnal bunt for “negligible %” instead of “nil” but PPQ bureaucracy of Iran has not budged. Apparently the value added business of pharmas and rail lines/steel pipes appears to be doing well. Engineering business/oil exploration is also being supported at political level for India’s concerns with Pakistan, Afghanistan and Baluchistan.

Coming back to the commodity trade, trading experience even under rupee trade managed through UCO bank, has not been very rewarding for the Indian counterparties—not because the trade did not materialise but because of two vital factors. First Indian traders were competing with each other and sabotaging the on-going business by offering varied terms of trade and compromised specifications. Secondly, Iran knew that Indian side has made money and they levied custom duty or imposed rigid custom regulations that offered Iranian buyers opportunities to get hair cut from the contracted prices. In both these cases, Iran called the shots.

 Indian trade has no contractual recourse because Iranian law is incorrigible.  In Government business bid bonds and PGs are demanded with unlimited time frame. Letters of credits once issued by Iranians banks are very difficult to get amended.  Government departments are working in silos—for example—commerce department will have no say in agriculture—the type of working relationship we have in India. Iranian traders sight currency fluctuations or some government regulations for non- performance and Indians are totally at their mercy because factual position remains veiled.

GTC and other traders have very “intimate” contact with MNCs. Their “preference” for commodities lies elsewhere except Basmati rice. Even during sanctions food items were not under any prohibition, so Iran continued to exercise sourcing elsewhere despite surplus in UCO bank rupee account.

Iran works as per their priorities with patience—with utter disregard to any agreed provisions-- and it is not possible to extract a viable bargain because they are exposed to rough and tough trading environment.

CONCLUSION

On short term, India may find itself isolated from Iran in trade (except Basmati rice). Iran will court Western powers/China and other origins for trading and building up its other petrochemical capabilities. All nations (P5+1) are not signing the nuclear agreement for charity.  Trade, in preference to investment, will be foremost in their minds. Dubai will surely emerge as a vital trading hub. Indian trade will be best served by dealing with Dubai counterparties who may take exposure to Iran.

 Iran too will go through developmental phase. But surely it will rebuild its nuclear capabilities under one pretext or the other. That will again lead to some sort of disruptive environment in trade. The on-going Sunni –Shia discord can also go through expansionary phase which may compel western powers again for interventionist measures. Thus, on long term India will again be in the reckoning.

At this point of time India has to walk back in trade.
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POST SCRIPT----

IRAN TALKS TOUGH WITH INDIA ON STC $233 MILLION RAIL TRACKS DEAL –
COMMERCE SECRETARY COMES EMPTY HANDED

INTERESTING TO READ THE NARRATIVE BELOW REGARDING—STC/SAIL/JINDAL STEEL.

(PARTLY REPRODUCED FROM REUTERS REPORT OF 20TH MAY 2015

Under a tentative framework agreement reached between six major powers and Tehran in April, Iran agreed to

limit its nuclear activity in return for sanctions relief. A final deal could be reached by June 30.

That prospect appears to have emboldened Iran, said sources familiar with trade negotiations with India,

including in its handling of a sizeable deal to import railway tracks.

The $233 million contract, signed last October, was for India's State Trading Corp (STC) STCI.NS to facilitate exports of rail tracks from SAIL Ltd SAIL.NS and Jindal Steel and Power Ltd JNSP.NS to Iran's railways.

But Iran told Indian negotiators that it had offers from other countries, including Turkey, to supply the

equipment at a cheaper cost, the sources said.

Last month, New Delhi sent trade secretary Rajeev Kher to persuade Tehran to adhere to the original terms,but he came back "empty handed", according to one of the sources.

"They are no longer the same Iranians that came to us last year for signing the deal," the source said. "They

were polite this time, but had an upper hand in the negotiations."

India has cut the value of the deal by about 7 percent to $217 million, the sources said. They added that they worry the Iranians may seek further cuts, and could split the order with other countries.

STC chairman Rahim Khaleel declined to comment. Kher, Iran Rail, SAIL and Jindal Steel did not respond to requests for comment.

It was not immediately clear whether other countries that trade with Iran have seen a similar hardening in

Tehran's stance. Oil refinery sources in Japan said they had not seen any change yet.

"WAIT YOUR TURN"

Iran said it wanted to renegotiate the rail contract, because the euro had declined against the dollar and steel and iron ore prices had fallen significantly since the deal was first struck in 2014.

Indian negotiators said price and currency risks were incorporated into the original agreement, but they had to give in, the sources said.

It was a large order for the Indians and the spectre of competition from other suppliers loomed large, they

added.

"Earlier they were standing in line to offer us deals," one source said. Now, they ask the Indians to "wait in line and wait your turn."

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FINANCIAL EXPRESS 30TH MAY 2015