Opinion

US sanctions to redefine India-Iran trade

Tejinder Narang | Updated on November 21, 2017

Indian exporters are jittery about payments not coming on time.

Sanctions will imply higher rupee trade with Iran. This is an opportunity, provided payment snags are fixed.



From February 6 onwards, Indo-Iran trade will undergo substantive changes in view of the recently reported US’ modified sanctions on Iran, which mandate 100 per cent payment in the currency of the importing country for Iranian products.

Banks and other financial institutions have to carry out stricter due diligence on corporates, their counterparties and trades before processing any payments.

This will affect even traders whose activities are unrelated to Iran. In short, the risk of doing business with Iran will be high. However, the ‘challenge’ that US’ recent action provides is, in fact, an “opportunity” for greater bilateral commercial cooperation between India and Iran.

The immediate implications for India are — all imports, most of it being in crude oil, of about $15 billion (Rs 79,500 crore) — will be paid in “rupees only”, instead of the rupee/euro ratio of 45:55 finalised under the 2012 agreement with Iran.

Likewise, Iranian urea will also be accessed under 100 per cent rupee payment, instead of UAE’s dirhams, as was the past practice. Massive rupee payments will be credited in India’s UCO Bank account held in the name of Central bank of Iran, from which Indian exports will continue to be financed.

This is subject to Iran’s acceptance of 100 per cent payment of their crude, fertiliser or other items in Indian rupees.

ENLARGING EXPORT BASKET

However, annual Indian export is around $2.5 billion to Iran, which may be stretched to a maximum $4 billion (Rs 21,200 crore) in a year’s time. This will mean surplus credit balance of $11 billion (Rs 58,300 crore) for Iran.

This excess may be mitigated by additional Indian exports, for which both India and Iran have to promptly fix existing snags — proactively increasing commodities in the export basket.

Iran has reportedly sought permission of the Government to invest its surplus funds (arising out of India’s rupee imports) in government securities and for financing its imports from third countries. India is reported to be examining this request.

Present projections are that “Iranian rupees” will multiply to Rs 175,000 crore in three years and may have to be auctioned finally at a huge discount, like the disposal of the “Soviet Rupees escrow account” left over under Indo-Soviet “Special Trading Arrangements”.

The only way by which this can be prevented is if Indian exports rise exponentially, or investment in Government securities and funding third country exports is agreed upon — all of which might attract US ire.

FIX SNAGS

India’s current export composition includes rice, corn, soyameal, sugar, tea, pharmaceuticals, and iron steel products worth $2.5 billion. Rice exporters with an annual business of around $1 billion have suffered on account of large outstandings and unpaid bills in 2011 and 2012 — both through the Dubai route and UCO Bank channel.

Soyabean meal shippers are jittery for the same reason. Wheat export of 3-4 million tonnes has been in a limbo for one year, due to inflexibility on the part of Iran’s phyto sanitary authorities.

However, under the modified dispensation, Iran can buy and India can sell everything from pin to cotton, textiles, garments, automobiles, trucks and construction equipment in rupees. Uncertainty of payment is extremely critical for restoring confidence in dealing with Iran. Disbursal arrangements of export payments by UCO Bank are risky, dilatory and financially painful.

Traders have to wait for up to two-three months for a message from Iranian bank for a “debit advice” in rupee account managed by UCO Bank, under Iranian letter of credits (LCs), resulting in disappearance of their margins. UCO Bank seems wary of certifying compliance of the shipping documents with terms of LCs for transmitting payments to the exporters, in spite of a “debit authority” ingrained in LC.

If UCO Bank is so wary, then it could engage the services of three or four Iranian officials on deputation who can be posted in New Delhi, Kolkata or Mumbai and who are conversant with Iranian system of verification of documents.

The Reserve Bank of India or the Government may also step in to allay the Bank’s fears. It could involve other banks to ensure competitive services. (Iran has nominated four banks to deal with Indian side.) Under the earlier Asian Clearing Union, or under the Indo–Soviet rupee trade till the 1990s, payments through Indian banking systems were processed promptly.

ROUTING EXPORTS

Iran may also source goods or commodities which India can import in hard currency as “ quid pro quo”. For example, it may be willing to take refined edible oil (palm or soy) in 5 kg consumer packs (whose exports has been cleared on January 31 by Cabinet Committee on Economic Affairs without any quantity limit subject to a minimum export price of $1,500/tonne f.o.b). Ten million tonnes of edible oil is annually imported by India from Indonesia, Malaysia, Brazil and Argentina.

Export of refined sugar in rupees from the raw sugar imported from Brazil may also be feasible at competitive prices, when Indian prices lack export parity. Exports through “Special Economic Zones” in rupees can also be considered for containing trade imbalance.

A new breed of local Indian companies may be formed as facilitation agencies at the behest of Iranian corporates.

These “shell” companies might scout for Indian products and sellers of repute. They will act as intermediation agencies with Indian exporters on behalf of Iranian principals for assuring swift payments.

These entities may receive advance payments or large-valued LCs through UCO Bank for swift transmission of sums to Indian shippers.

(The author is a freelance commodity analyst.)

Published on February 04, 2013

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