Forget bartering. Iran’s got cash to spend and it’s on one hell of a shopping spree.
Countries who import Iranian oil have been given until June 28 to curb their trade significantly or risk reduced access of their own financial institutions to the US financial market. The EU in turn will turn off the pipeline on July 1, ending its oil imports from Iran on that date. The expectation is that scaling up sanctions will get Iran to put an end to its nuclear program at last.
But as the old saying goes: make hay while the sun shines.
Iran’s government allocated US$22 billion to buy commodities during the fiscal year that began at the end of March. That’s an extra US$2 billion on top of what was allocated last year, setting the stage for rumours that the country is on a massive shopping spree to stock up on basic commodities before the end of June when stricter sanctions will come online.
Those rumours turned into expectations and have now turned into reality. This week the country bought between 50,000 and 100,000 metric tonnes of raw sugar from Brazil for July delivery, with expectations that it comes from Bunge. Raw sugar purchases likely reached a quarter of a million tonnes just in the past fortnight alone.
The country also swept up 60,000 tonnes of milling wheat from Australia and a delegation of 56 government officials as well as representatives from private and publically-owned companies are in India to see what it can get with its sudden plethora of rupees before the sanctions come into play.
Already in March, India did a deal with Iran for 60,000 tonnes of raw sugar for March-April delivery and it appears that now Iran is looking for more, but it’s unclear what happened beyond the general topic of “sugar” and that “deals” for sugar trade have been struck. No figures on actual sugar sales have been announced as of yet.
What is clear, however, is that among cereals and other basic commodities, sugar has a top priority for import into Iran. Recent inflation figures for the country show that sugar prices for the second week of April rose by a third, year-on-year. Grain prices were more dire still at roughly 50% while prices for vegetables are up by nearly 100%.
Getting as much purchased as possible in as short a time as possible has become a real priority for the country, but how to pay for that trade has quickly become a serious challenge. In mid-March, the SWIFT banking system that facilitates international monetary trade removed all Iranian banks from the system. That caused a major hitch, so it remains unclear exactly how the Australian wheat and the Brazilian sugar will be paid for.
Around the same time as the SWIFT debacle, Iran and India invented their own banking system that would allow for trade in rupees and rials rather than US dollars but the system is only functioning at about 80% so far. There are still a lot of kinks to work out of the system before major transactions can take place. Up until now, the system has been used only for small amounts related to clearing a backlog of debts, with the total reaching about INR3.8 billion (US$71 million).
Compared to the US$10 billion in additional trade the two countries want to achieve this year—even with the threats of sanctions sitting over it—that system has got to be flawless to support that level of trade. That system’s existence was one of the draws of bringing over such a large delegation. With a soon-to-be huge supply of rupees on hand, they had to figure out exactly what the buy with them. The answer will be sugar and soybeans for sure, in addition to other commodities.
The delegation’s visit, who are set to return home Friday, coincided purposely or coincidentally with the visit of US Secretary of State Hillary Clinton to New Delhi in no small part to encourage the country to reduce its trade with Iran. So while in one part of town Clinton was pushing for an end to Iranian oil imports, on the other side of town Indian businessmen were selling Iran its sugar and soybeans. Yet India remains very committed to abiding by the trade sanctions, they say, and don’t want to stir up trouble with their access to US banks. Technically foodstuffs and basic commodities aren’t affected by trade sanctions, but a lack of access to financial markets can block trade of food as well, as Iran’s ally Syria has learned recently.
Syria has fallen into dire straights in terms of its food supply. The World Food Programme is already feeding 250,000 people and, as food prices rise, that will soon double and eventually as many as 1 million people may need support. Reuters reports that even though the country needs to import as much as 4 million tonnes of grain this season, it can’t get companies who are willing to trade with it to either take the risk of doing business with Syria or find ways around the financial roadblocks imposed by sanctions for other types of trade. With concerns about arms shipments hidden in vessels bound for the region that may hold something as benign as wheat, costs have skyrocketed because of additional checks and security measures on shipments in the eastern Mediterranean.
It’s already assumed that Iran, who has so far been able to find ways around the sanctions and keep on with its commodities shopping spree, may be looking to help supply basic foodstuffs to Syria as well, either smuggling via Iraq or through purchases made on the country’s behalf. Already it’s expected that most of Syria’s imports will have to be done via smuggled shipments coming from Jordan and Lebanon, with some trade somehow taking place via Russia and China since traditional trade routes have been blocked. But the situation is beyond tricky and Iran’s remaining access to global markets may be one of Syria’s few short-term options for survival.
What will become of Iran’s access to commodities come July, however, is an entirely different question. Coming up with a rupee/rial type trading system as it did with India for every would-be supplier is out of the question. So would Australia trade with India to route its sugar through, or would it just be happy to be paid in rupees, then convert it back to Australian dollars? What about Brazil? Or should everyone expect to just be paid in oil, much in the same way that Pakistan originally proposed with its barter deal—that’s still waiting for approval?
With just six weeks to go, some pretty clever people better put their thinking caps on to see how the country will continue avoiding sanctions since it seems clear no one wants to turn off the nuclear reactors.