Rupee pact with Iran on the rocks

Tejinder Narang | Updated on March 12, 2018

Post-sanctions, Iran may cut down on buying Indian rice.


A US-EU nuclear deal with Iran may pave the way for the end of sanctions. Iran’s reliance on India will reduce.

The Obama administration and EU are moving closer to an agreement — or an interim agreement — with Iran on its contentious nuclear programme, with Russian intermediation.

Even with an interim agreement, the US and its allies will lose the authority to tell others not to do business with Iran. This automatically implies the gradual tapering of economic sanctions on Iran.

A renewed trading pattern with Iran can emerge thereafter.

India’s rupee trading arrangement could be affected by these developments. This is not the first time bilateral trade pacts with Iran have suffered.

Two earlier pacts with Iran came to an abrupt end. The 1976 barter arrangement with the Kudremukh Iron Ore Company Limited (KIOCL), against which Iran invested $630 million in return for iron ore, was abandoned in 1980 due to changed political realities.

Another bilateral trade and payment mechanism — the Asian Clearing Union (ACU) — was terminated by the RBI in December 2010 under US pressure.

Under the recent rupee trading agreement of February 2012, India’s UCO Bank is nominated to deal with four Iranian banks for payment in a 55:45 ratio of hard currency and rupees, respectively.

However, the US and the EU have applied pressure by denying insurance, particularly shipping insurance, to Iran-origin cargo. On February 6, 2013, the US mandated that India must pay Iran entirely in rupees for the import of crude oil, to which Iran has remained defiant.

With greater advancement in non-proliferation talks, Iran’s attitude on the rupee payment arrangement may harden.

All bilateral or special trading agreements come about due to political and economic necessities.

They collapse later, leaving many unsettled issues. The Indo-Iran rupee agreement is moving towards such a sunset state. The 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 such as tea, coffee, textiles, and pharmaceuticals have also witnessed better export prospects.

Price realisation and profitability per unit is better than other conventional markets. Corn and raw sugar export from India is also picking up, though slowly.

Pros and cons

Indian companies are, however, exposed to OFAC (Office of Foreign Assets Control of US) surveillance. Their non-Iranian business may be restricted through punitive actions on banks dealing with remittance to Iran.

Iran’s exports to India peaked to $13 billion in 2012-13 for supply of crude oil, urea, petroleum products, saffron, dry fruits. By April 2013, the trade balance in favour of Iran was about $8 billion (Rs 4,32,000 crore at Rs 54 to the dollar).

A steep depreciation in the rupee vis-à-vis the dollar due to the expected QE tapering off and higher twin fiscal deficits, CAD and fiscal, would result in erosion of the value of Iran’s trade surplus with India. There has been a 17 per cent depreciation of the rupee (from Rs 54 to Rs 63 to a dollar) since then. It means Iran is losing out on oil as well. Would such an arrangement be acceptable to Iran?

Iran also finds it difficult to source large quantities of “quality” wheat, corn, sugar from India. It prefers sourcing them from origins of its choice, if hard currency is amply available.

Beyond rupee trade

Indian trading entities have so far overlooked the impact of a possible deal between Iran and the international community. There is no legal recourse or procedure in place to close the rupee agreement under that eventuality. India can attempt diplomatic intervention, or endless rounds of “discussions”.

If trading restrictions are phased out or tapered by the US orEU, it stands to reason that Iran will undertake business on a competitive basis. Indian basmati rice will be pitted against aromatic varieties of Thailand and Pakistan.

Soymeal, corn, and 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. Preferential treatment to India will end forthwith.

On the positive side, international insurance 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 types of commodities and services leading to its faster liquidation; 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

Industry chambers should assist the Department of Commerce, Ministry of Finance and the Ministry of External Affairs to evolve a strategy to wind down the rupee agreement so that it does not disrupt bilateral trade.

UCO Bank should also provide necessary inputs to all concerned and the RBI. The idea is to be prepared for the effective end of sanctions on Iran.

(The author is a grains trade analyst.)

Published on November 21, 2013

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