UK Forbids Shell to Pay Iran Debt in Food

The UK government has not granted permission to Shell to pay  outstanding debt it owes to Iran in food and pharmaceuticals.

Shell owes Iran $2.3 billion on earlier oil deals and has an interest to repay this debt to maintain good relations with the OPEC producer.

As financial sanctions prevent payment in cash Shell sorted out possible barter deals with British pharmaceutical company GSK and global grain trader Cargill. Iran is already trading part of its oil in barter deals with Pakistan or against non-convertible Rupees in the the case of India.

Food has been exempted from Iranian sanction regimes, yet Iran switched from the US to Australia as a major supplier at the height of the hostage crisis in 1979 out of fear of US food boycotts as I outline in chapter 4 of Oil for Food.

As a result of droughts Iran has increasingly resorted to food imports in recent years, also from the US of all things. This happened despite efforts at self-sufficiency, particularly in wheat.

While Iran managed to increase wheat production in the 2000s, this happened at the expense of other food items like vegetables and meat that witnessed an import boom.

Self-sufficiency remains elusive and the country continues to e dependent on grain imports, which it regards as a strategic liability in light of the current sanction regime.

The Ability to Pay: One Third of Iranians go Hungry

Sanctions and the resulting currency crisis, the Iranian riyal plunged more than half over the last year, affect food security in the country too.

Food accessibility is compromised for lower income households. About a third of Iranians have been cutting back their diet.Luxury products like dairy or chicken are consumed less.

The situation is exacerbated by neglect of the agricultural sector and recent droughts.

Like in Egypt, strained foreign exchange position affects the ability to import sufficient food at affordable prices.

Iran’s New Three Tiered Exchange Rate and Food Trade

Iran continues to be plagued by financial sanctions that hurt its ability to export oil and import vital goods like food or gasoline, which is scarce due to a lack of refining capacity.

One way to cope with this issue have been oil for food barter arrangements with Pakistan and the acceptance of non-convertible Indian rupees as payment for oil. Now a new coping strategy has been devised with a new currency system.

As the Iranian Rial has lost about half of its value compared to the dollar over the last year, the government has switched from a managed float that kept the official exchange rate in balance with free market rates to a three tiered system that rations foreign exchange.

Such a system was already in place during the Iraq-Iran war in the 1980s and during the subsequent reconstruction in the early 1990s. Food imports had high strategic importance for the Iranian leadership during the war as I outline in chapter four of my Oil for Food book.

The allocation mechanism of the new currency system highlights the crucial importance of food imports for political legitimacy.

The highly subsidized official rate of IR12,260 is less than half the free market rate of IR26,880 rials and applies only to imports of essential commodities like grains, meat, sugar, vegetable oil, and medicine.

For all other items, importers essentially have to pay the double:

The second tier is a “non-reference” rate that only trades about 2 per cent below the free market rate. It currently stands at IR 23,927 and applies to livestock, metals and minerals.

All other imports like appliances, cars or clothes are regarded as less essential and strategic.For them one has to pay the free market rate.

It remains to be seen how this oil for food nexus plays out as the Iranian nuclear stand-off unfolds and whether the US might be tempted to use food trade in an openly political way as it did – unsuccessfully – during the 1970’s.

Update: India considers Wheat Exports to Iran

Following our earlier post about Iranian wheat imports, Iran is now sorting out with India how it could pay for oil deliveries with food.

Iran is reeling under sanctions of its financial sector and has problems in receiving payments of its oil exports. Earlier this year India decided to try to settle 45 percent of its oil trade with Tehran in Indian rupees, which are not fully convertible and globally traded. This would offer the opportunity to settle Indian oil payments without the involvement of foreign banks.

As food is exempted from even the more extensive US sanctions regime, oil for food barter agreements could offer a similar and timely relief for Iranians trade policies.

“Exports from the South Asian nation accounted for about $ 2.8 billion versus imports of about $ 11 billion in 2010/11, according to government data.” The trade would also offer advantages to India. After a bumper harvest it has problems stockpiling wheat in the producer regions in the North East of India and distributing them in the rest of the country.

The Indian government ended a four year old wheat export ban in September 2011.

India used to be a large wheat exporter to the Gulf until 2005, but has all but disappeared as a supplier since then. Productivity gains of the Green revolution fell behind population growth for the first time in the 1990s. Even with the recent bumper harvest it is unlikely that it will reconnect with this old role. Together with Pakistan it remains the major supplier of basmati rice to the Gulf region though.

Saudi Arabia Srategic Storage: Why Flour and not Wheat?

The Saudi Minister of Agriculture Fahd Balghunaim has announced that the kingdom’s strategic wheat storage covers now consumption for six months and stands at two million sacks of flour.

Ultimately the kingdom aims at 12 months.

It is surprising that they store flour and not wheat itself. The Ford Foundation started the planning for an expansion of the Saudi wheat program in the 1960s and one of its arguments was that flour is not good for storage. Instead Saudi Arabia should expand wheat production and domestic milling capacities to enable strategic storage the argument went.

Why is the storage now in flour, which does not seem to be the optimal solution? Is there not enough milling capacity? (This would be surprising given past wheat self-sufficiency in Saudi Arabia).

US Wheat Exports to Iran: Just Commercial or Carrot in the Sanctions Game?

Iran is continuing its wheat import spree against the backdrop of sanctions and the nuclear stand-off.

It has already purchased  or tried to purchase 3 million tons this year. In good years Iran is self-sufficient in wheat and has production subsidies in place to encourage such self-sufficiency. Yet it imported 7 million tons in 2008 after a drought and a bad harvest. Due to inclement weather this year’s harvest is not expected to be a good one either.

1.8 million tons of the 7 million tons came from the US. The US has never included food in its sanctions against Iran. It contemplated such measures in the wake of the hostage crisis in 1979, as declassified documents in the Carter Library reveal, that I have seen. Yet, food was never included in sanctions because it was assumed that “Iran’s oil is a powerful tool in finding alternative sources of supply for agricultural goods.”

Such trade diversion indeed happened in the wake of the grain embargo against Russia in 1980. It failed to achieve its foreign policy objectives and just angered the US agro-lobby.

Wheat sales to Iran just require the approval of the US Treasury and sales of more than 100,000 tons of any commodity to any country need to be reported to the USDA by law.

Apart form the commercial interest of the agro-lobby and the negative track record of food embargoes as a foreign policy tool the US might be tempted to use the carrot of food exports as a show of good will in negotiations around the nuclear program.

Recently US food aid delivery to North Korea coincided with a suspension of enrichment activity and a moratorium on nuclear and missile tests by North Korea. Marcus Noland and Stephen Haggard of the Peterson Institute have showed a historic coincidence of American aid offers and North Korean diplomatic concessions.

This year the US has already exported 180,000 tons of US wheat, enough to fill two large cargo ships. Another 200,000 are rumored to be contracted.

Iran has also purchased 120,000 tons of soy meal from India and asked to import a million tons of wheat from Pakistan in a barter deal against iron ore and urea.

It would be interesting to know how the Iranians pay for the US wheat imports given the financial sanctions which make dollar transaction all but impossible. Maybe a big commodity trader like Cargill or Glencore is accepting barter deals as well or takes not freely convertible Indian Rupees from Iran’s still vibrant oil trade with India.