March 30 (Bloomberg) -- Iran and its leading oil buyers, China and India, are finding ways to skirt U.S. and European Union financial sanctions on the Islamic republic by agreeing to trade oil for local currencies and goods including wheat, soybean meal and consumer products.
India, the second-biggest importer of Iran’s oil, has set up a rupee account at a state-owned bank to settle as much as much as 45 percent of its bill, according to Indian officials. China, Iran’s largest oil customer, already settles some of its oil debts through barter, Mahmoud Bahmani, Iran’s central bank governor, said Feb. 28. Iran also has sought to trade oil for wheat from Pakistan and Russia, according to media reports from the two countries.
The trend is growing, sanctions specialists and U.S. officials say, and is denying the Islamic Republic hard currency to prop up the plummeting value of the rial and to fund nuclear and missile programs. Iran already is starved for dollars and euros to support the rial, and barter deals will force it to spend billions of dollars of oil revenue on goods, according to Kenneth Katzman at the Congressional Research Service, a nonpartisan government-research institute in Washington.
“Iran cannot stabilize the value of its currency with such unorthodox payment methods, and that is why its economy is collapsing,” Katzman, an Iran sanctions specialist, said in an interview. “Iran is essentially on a junk-for-oil program.”
Local Currency, Gold
The second-largest producer in the Organization of Petroleum Exporting Countries, Iran said last month it will accept payment in any local currency or gold as new sanctions make it harder for trading partners to pay in dollars and euros.
The barter trend, lawyers and trade analysts say, is exposing an unintended consequence of sanctions. Cutting Iran off from the global financial system, they say, is driving trade into informal channels and producing greater opportunities for corruption and the diversion of funds for illicit purposes.
“Payments through the financial system are easier to police, and there is less scope for corruption,” said Nigel Kushner, a London-based attorney who specializes in Iran sanctions and export controls.
While “the upside of denying Iran access to hard currency for furthering its nuclear program outweighs the downside of decreasing transparency and pushing trade underground, we could be left very much in the dark as to who is dealing with Iran,” Kushner said in an interview.
Harder to Police
“When you force trade out of established channels, you have no way to measure it” or to verify that Iran’s trading partners are abiding by global sanctions regimes, said Barbara Slavin, a senior fellow at the Atlantic Council, a Washington research group.
Iran is feeling the impact of tightened sanctions on finance, insurance, shipping and energy. The Society for Worldwide Interbank Financial Telecommunication, known as Swift, expelled Iran’s central bank and more than 20 other Iranian banks this month, making it almost impossible for Iran to complete large international funds transfers.
Exports from Iran will be cut by 600,000 to 700,000 barrels a day because of the international sanctions, Michael Lo, an analyst at BNP Paribas SA, said in an e-mailed note today. Oil prices are set for a new rally in the fourth quarter as demand outstrips growth in non-OPEC supplies, according to the bank.
The biggest winners in the rise of barter deals with Iran are India and China, the world’s fastest-growing major economies, which now are able to meet some of their burgeoning energy demands by trading rupees and yuan or agricultural and consumer goods, analysts said.
Oil for Electronics
Iran is using yuan paid into Chinese bank accounts to buy Chinese-made washing machines, refrigerators, electronic goods, toys, clothes, cosmetics and toiletries, Katzman said.
Rupee payments to Iran from India may total at least $4 billion a year and will be deposited in India’s state-run UCO Bank, which doesn’t have U.S. operations and is unlikely to be affected by the global sanctions, according to an official with knowledge of the matter who declined to be named because the information is confidential.
Payments in local currencies such as the yuan and rupee, which are not fully convertible, are less beneficial for Iran than hard currencies such as dollars, euros, and Japanese yen.
Trevor Houser, an energy analyst and partner at the Rhodium Group, a New York-based economic research firm, said paying for Iranian oil in rupees is “a pretty good deal for India, and it’s a pretty bad deal for Iran.” It limits the goods the Persian Gulf nation can buy and “deprives Iran of the hard currency they need for effective monetary policy,” he said in a telephone interview.
India’s $2.7 billion in exports to Iran last year amounted to less than a third of the $9.5 billion worth of crude oil that India bought from the Islamic Republic, meaning it may prove difficult to pay for as much as 45 percent of Iran’s oil exports through barter.
Barter deals themselves don’t violate sanctions provided that no laws are broken, such as dealing with sanctioned banks and companies or providing technology for Iran’s nuclear program, according to three Obama administration officials who spoke on condition of anonymity because of the sensitivity of the issue. So long as countries comply with a new U.S. law by reducing Iranian crude imports, there’s no prohibition on paying for that oil with legal goods and services, the officials said.
If India pays for oil with wheat, one U.S. official said, that’s better than paying the Iranians in dollars or euros they might use to buy additional centrifuges to enrich uranium.
Another U.S. official said the administration has no evidence that any country is using barter deals to conceal increased oil imports from Iran or to trade in illicit goods.
Iran earned about $100 billion from crude oil exports in 2011, according to International Monetary Fund projections. U.S. and EU sanctions imposed since November are intended to squeeze the Islamic Republic’s economy, persuading its leaders to abandon any illicit aspects of its nuclear program.
United Nations inspectors issued a report Nov. 8 raising questions about possible military dimensions of Iran’s nuclear program, adding fuel to U.S., EU and Israeli claims that Iran is seeking to develop nuclear weapons. Iran says its program is strictly for civilian energy and medical research.
China and India have maintained commercial ties with their Persian neighbor even as the sanctions have created obstacles. Trade among the nations dates back 2,200 years to the Silk Route, a trade network spanning Central and East Asia.
While neither China nor Iran has made details of existing barter arrangements public, China’s exports to Iran increased to $14.8 billion in 2011, compared with $900 million in 2001, according to Chinese customs data. China imported $21.7 billion in Iranian oil last year, the figures show.
India exported $2.7 billion worth of goods to Iran in the financial year that ended in March 2011, according to India’s Department of Commerce. Iron and steel articles were the biggest category, accounting for $623 million. That was followed by $454 million in products including inorganic chemicals, precious metal compounds and rare-earth metals, and $419.6 million in cereals.
Seventy Indian business representatives met Iranian companies and officials in Tehran and Tabriz this month to discuss boosting trade, said Anand Seth, spokesman for the Federation of Indian Export Organizations, which organized the tour. The federation, a partnership between private companies and the Indian Commerce Ministry, won’t release the names of the Indian companies for fear of subjecting them to pressures from the U.S., Seth said.
“Barter trade is nothing new for Iran, and the country’s merchant mentality will adapt quickly to the new situation,” Bijan Khajehpour, an Iranian business consultant based in Vienna, said in an interview.
To contact the editor responsible for this story: John Walcott at email@example.com