Iran imports millions of tons of Basmati, mainly from India and Pakistan, but US president Donald Trump's maximum pressure campaign has hit the Iranian banking system, forcing exporters to stop the supplies.

Muhammad Shafique owns a sprawling, state-of-the-art rice mill in Pakistan’s Hafizabad district, a region known for its vast paddy fields and a hub for factories processing rice for export destinations in the eastern province of Punjab. His product, the milled Basmati – a rice variety famous for its aroma and long grain - ships to markets for the South Asian diaspora across the world. But these days, trade has hit a setback as rice exports to Iran - the world’s biggest buyer of Basmati outside of traditional growers Pakistan and India – have come to a grinding halt. 

“Business with Iran is zero these days,” he says, refuting widely circulated Indian media reports that Iranian traders are now procuring Basmati rice from Pakistan after Indian exporters refused to sell rice before clearing outstanding dues.  

“They [Iranian importers] are interested in buying [Basmati rice] and are enquiring from us [about our product]. But when it comes to payments, they become helpless.” 

Shafique’s business with Iran had resumed after years of stalemates when US President Barack Obama eased sanctions in 2015 under the Joint Comprehensive Plan of Action, a nuclear deal aimed at ending Iran’s diplomatic isolation in return for the promise of reducing its uranium stockpiles. Shafique says he exported around 50,000-60,000 tons of Basmati to Iran over the two years. However, when President Trump unilaterally pulled out of the agreement in 2018, and reinstated economic sanctions on Iran, it became increasingly difficult to conduct business with the bordering country as banking channels dried up and Iranian importers found it difficult to domestically procure dollars on a cost effective exchange rate to pay for the rice. 

At present, millions of dollars’ worth of payments are stuck in Iran against Basmati rice imports, claim exporters in India and Pakistan, who have stopped taking orders from the once thriving market. 

Iran’s Basmati trade 

Iran’s consumption of basmati rice – a staple in the local diet - tops 2.5 million tons annually, of which half is locally grown and the rest is imported from India and Pakistan. Last year, India exported 1.4 million tons of the rice variety to Iran, earning $1.4 billion in revenue and making it the largest export market for Indian rice in the world. Over the same period, Pakistan exported 77,000 kg of rice to Iran earning a little over $67,000, according to the World Bank data. 

The figures for Pakistan, however, widely underreport the actual size of the rice trade that typically takes place with Iran, says a senior member of the Rice Exporting Association of Pakistan (REAP), on condition of anonymity. A significant volume of Basmati rice moves through border checkpoints, where misdeclaration of goods, often with the collusion of customs officials, enables local rice traders to maximise profits. Another route taken by Pakistani exporters is to ship rice from Karachi to Bandar Abbas ports, with payments routed through Dubai. 

“Iran is a sanctioned country so no [Pakistani] bank issues an export-form [to exporters], which is mandatory for exports,” says the REAP official. Even though sanctions do not apply to Iran’s food and medicine imports, banks do not process trade transactions that pertain to Iran for fear of reprisal from the Americans, he adds. 

As a way around this problem, Pakistani exporters could apply for an e-form with the bank, stating Dubai as the destination, which was later changed to Bander Abbas at the backend. Then a copy would be sent to the importer in Iran. This way, rice cargo was shipped directly to Iran. 

“Mostly the destination shown to the banks was Dubai but 70 to 80 percent cargo landed in Iran,” he said.  

A porter uploads a bag of Indian rice in Eghlima, an Iranian dhow which exports 250 tons of rice to Bandar Lengeh in Iran at the creek in Dubai, United Arab Emirates, Tuesday, July 1, 2008.
A porter uploads a bag of Indian rice in Eghlima, an Iranian dhow which exports 250 tons of rice to Bandar Lengeh in Iran at the creek in Dubai, United Arab Emirates, Tuesday, July 1, 2008. (AP)

REAP’s website shows the UAE as the top destination for Pakistan’s Basmati exports, with annual shipments of 74,860 metric tons, valued over $89 million. 

Meanwhile, India was able to sell rice and other food items to Iran in exchange for crude oil imports, with local-currency payments made through Indian bank accounts, bypassing international banking channels. The arrangement hit a snag when Trump effectively ended sanctions waivers on Iran's oil imports in May 2019. 

Now, with oil trade suspended, Iran faces a depleting rupee-rial account that is making it difficult for its rice importers to make payments to traders in India. According to Indian media reports, talks of alternative barter trade are underway.  

The present crisis

The Iranian government is facing its worst economic crisis in years, as US sanctions, drop in global oil prices and the coronavirus have led to spiraling inflation, sharp currency devaluation and a yawning budget deficit. 

With diminishing oil revenue and depleting foreign currency reserves of the Central Bank of Iran, the government banned local importers in March from buying dollars through the NIMA exchange, an online platform set up by the bank for Iranian exporters to sell their foreign currency earnings to importers at lower rates than the market. The NIMA exchange was established by the central bank in 2018 to protect dollar supply for food and medicines imports in anticipation of Trump’s sanctions.

Basmati rice importers have been particularly hit by this move as they now have to procure dollars at expensive rates from the open market. 

The dollar was selling for 263,500 rials on November 17, according to free market exchange rate website, bonbast.com, against the official subsidised rate of 42,000 rials per dollar and the NIMA rate of 251,873 rials per dollar. 

Sameeullah Naeem, CEO of Atlas Foods (Pvt) Ltd, that exports rice from the Basmati belt of Gujranwala, explains that if a trader imported rice for $1000 and sold it domestically for 120 million toman (a higher denomination currency equal to 10 Iranian rials), thinking he will recover the amount from the NIMA exchange, he will now be recovering only half his dollars when going  to the open market. “The importer tells you that you either wait for the NIMA system to open, or take half the dollars from the open market,” he says. 

As a result, Pakistani and Indian exporters have now suspended all trade until all outstanding dues are cleared. 

“We are not interested in further shipments until the Iranian government does not provide its importers with dollar allotment on cost effective rates. And our dues are not cleared,” says Naeem. 

Basmati rice imports registered a 48% decline over the first five months of the current Iranian year (March 20-Aug. 21), according to Secretary of Iran’s Rice Importers Union, Masih Keshavarz. 

This has caused Basmati paddy prices to fall in both India and Pakistan, while food prices in Iran, including that of Basmati rice, are skyrocketing.

The Biden factor

Pakistani rice exporters are hopeful that the projected Joe Biden administration in the US will ease sanctions on Iran, making it easier for them to conduct trade with the country. 

Biden has pledged to return to the nuclear deal if Iran shows compliance towards reducing its nuclear stockpiles. 

“From March onwards, I see that Iran will return to oil-versus-food agreements and have access to supply of dollars, and currency movements across borders will be eased,” says Naeem. 

He asserts that Pakistan will stand in good stead compared to India if sanctions on Iran are eased. “We are time efficient; it takes only three days for our shipping consignments to reach Iranian ports. We are also cost efficient - it takes around $40 per ton to ship to Iran and less than $10 dollars per ton for Pakistan,” he says. 

Last week, Iranian Foreign Minister Javad Zarif visited Pakistan in what was seen as a diplomatic jaunt ahead of a likely Biden administration in the White House. Zarif announced the opening of a sixth border crossing for trade between the two countries. 

But things could potentially get complicated for Biden as he would have to deal with a significantly more nuclearised Iran, one that also has an expanded ballistic missile program, and a more aggressive policy of supporting regional militias.

Source: TRT World