Iran Sanctions Waiver: US-Iran Geopolitical Tensions and its effect on Basmati Rice

After years of negotiation, Iran sighed a sense of relief back in July 2015 when they struck the nuclear deal with US to avoid economic sanctions. The relief lasted only for 4 years before US pulled out of the deal on August 2018 and imposed economic sanctions against the Islamic Republic. However, United States gave economic waiver to India, China, Japan, South Korea and Turkey to keep importing crude oil from Iran until Second of May 2019.

Rupee Mechanism for Trading with Iran

India and Iran have been carrying out trade through rupee mechanism to comply with economic sanctions on Iran. All imports from Iran, which mainly consists of crude oil, are paid in Indian Rupees through escrow accounts held in UCO bank and newly added institution to the mechanism the IDBI bank. These banks the funds to release payments to exporters of goods to Iran. Crude oil Imports from Iran were approximately INR 70,000 crore in Financial Year 2018-19 and exports to Iran were approximately INR 17000 crore FY 2018-19. India stopped purchasing crude oil from May 2nd 2019 and in absence of sufficient imports from Iran, recovering payments is a dilemma for the exporters.

Ajay Sahai, Director-General, Federation of Indian Export Organisations (FIEO), said: “Assuming there is no breakthrough in the situation and the government sticks to the decision of not buying oil from Iran, whatever money is lying in the UCO Bank at the moment will get used up. We will not be able to sustain exports beyond four months. Virtually all exports to Iran will stop.”As per rough estimate, the current trade balance is enough to sustain exports until the end of October but any escalation in US-Iran geopolitical tensions would have an adverse effect on the industry.

Impact of Sanctions on Basmati Rice Trade

India’s Basmati exporters to Iran have been very concerned about the impact on trade these fresh sanctions will have on the Industry. Anticipation of sanctions led to basmati rice prices dropping by atleast 3% and exporters holding up shipments to Iran fearing payment defaults. Since the sanctions on import of crude oil from Iran on 2nd of May 2019 there has been a sudden surge in demand for basmati rice from Iran.

Prices of Basmati Rice have increased by almost 20% since the economic sanctions waiver driven by shortage of crop and surge in demand from Iran. Trading with Iran might not be sweet in near future but basmati exporters are making most of the current situation.

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