US sanctions on Iran cast shadow on Indian exports

With the new US sanctions against Iran set to come into effect on Tuesday, the fate of India’s rice and tea exports may now depend on the possible exemption of food and medicines from the sanctions and the agreement on oil imports reached between New Delhi and Tehran.

“We are keen to study the details of the US sanctions against Iran. If food and medicines are exempt, it would be good news for exporters of rice and maybe of tea as well. But, exports also depend on India’s continued oil imports from Iran in the absence of which it might be difficult to work out a suitable payment mechanism,” a government official told BusinessLine .

As the fresh US sanctions are to be largely targeted towards graphite, raw or semi-finished metals (aluminium, steel, coal), or software for integrating industrial processes, New Delhi is hopeful that food and medicines supply would be exempted.

Restrictions are also expected on purchase or acquisition of US dollar banknotes by Iran and the trade in gold or precious metals.

“If rice and tea are exempted from sanctions, a part of the problem of Indian exporters is solved. But much would depend on the payment mechanism worked out between India and Iran for these exports as there would be sanctions against dollar payment,” the official said.

A rupee-rial payment mechanism, through the existing arrangement in the UCO Bank or a similar one worked out with Iran’s Pasargad bank’s proposed branch in Mumbai, could work out well but on one condition.

“Iran’s interest in continued imports of rice and tea from India and working out a suitable payment mechanism could be tied to India’s decision to continue a substantial part of its oil import from the Islamic country after November 4, when US sanctions on oil are operationalised,” the official added. Continued oil imports might also lead to Iran increasing its imports from India to reduce the existing trade gap so that the “barter-like’’ rupee-rial mechanism works to its full potential, he added. India’s imports from Iran in 2017-18, dominated by petroleum, were valued at $11.11 billion while exports were worth just $2.65 billion and comprised mainly of rice and tea.

The situation for exporters to Iran, at present, is uncertain, agrees Ajay Sahai from the Federation of Indian Export Organisation. “We have to wait and seen what India decides on imports of oil from Iran. Only when oil payments are to be made, will there be a mechanism for remittance of money due on oil imports,” Sahai explained.

No directions to banks

While officially there are no directions to Indian banks to stop payments for trade with Iran, with US sanctions in place some may be reluctant in negotiating export documents and releasing payments, another exporter added.

Vijay Setia from the All Indian Rice Exporters’ Association is hopeful that rice exports will not be affected as it was an essential commodity and was sure to be exempted from sanctions. “Once it is clear that rice is exempted, the payment mechanism can be worked out as the sanctions would only be against the US dollar and not against other currencies,” he said.

Key ministries, including petroleum, external affairs, finance and commerce, are in discussions amongst themselves and with the US and Iran, on what the country’s future strategy on oil imports from Iran would be. While the US wants oil imports from Iran to be cut down to zero by November 4, India may not be keen to do so.

“One factor that cannot be over-looked while analysing India’s possible stance on oil imports from Iran is how the Trump regime would react to countries that do not follow the sanctions. If the US government decides to impose secondary sanctions against such countries, the situation could be serious,” said Biswajit Dhar, Professor, Jawaharlal Nehru University.

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