Sunday, July 10, 2011

India to Pay for Iran Oil in Rupee Letters of Credit – India Press

A Barter Trade of Oil for Tea

The Calcutta Telegraph reports today that Iran and India are finalizing a deal on how India would pay for the purchase of Iranian crude oil. Indians will reportedly open letters of credit in rupee for the crude oil. Iran would then use the rupee credit line to purchase Indian goods such as tea and machinery [The Telegraph, 11 July].

The agreement, as reported by the Indian press but not yet confirmed by the Iranian authorities, would represent a major set back for Iran. It is effectively a barter trade of oil for tea (and other goods). It will force Iran to purchase Indian goods as opposed to similar goods available elsewhere, and not necessarily in best terms. The agreement would be, however, a major victory for India, opening up the possibility of globalizing the rupee.


Gifted one said...

Am i missing something here? The article actually states that,

"The (Indian)finance ministry is considering the option of allowing the buyers of Iranian crude to open letters of credit in rupee terms which can be used by Iran to purchase Indian goods, mainly tea, machinery and engineering services."

It continues saying,

"The excess left with Iran, however, will have to be converted to other liquid currencies such as the euro as India does not want any foreign nation to hold huge stocks of idle rupees."

find the article HERE

Nothing about "finalizing a deal", or about the Iranian govt even being aware of these Indian "finance ministry" considerations. The entire article sounds vague, no sources are mentioned or hinted at. It also suggest that an unknown percentage would be converted into non-indian currencies, possibly Euros(by whom, one wonders).

The article is mostly about India competing with China in internationalising it's currency.

Nader Uskowi said...

We said that the Iranian authorities have not yet confirmed the report, but the article is another confirmation of similar reports coming out of India in the past 48 hours that a deal is in the work, whereby Iran receives L/Cs in rupee for its oil. A high-level Iranian delegation is in India.

Your comment about the nature of the deal being about India's competing globally is correct. But that should not be Iran's priority or concern. I like to say that this deal, before it is finalized, is a rotten deal for Iran and the negotiating team should be aware of the Indian intentions.

Anonymous said...

I would agree with Nader. Indian rupee is not the most coveted currency and inflation is really high as well. On top of that India's manufacturing/industrial sectors are much inferior to Iran's, even in terms of technology application. Robotics are far more extensively used in Iran, and most are top rate Japanese and Korean models. Indian economy is mostly hand cranked small manufacturing, low yield agricultural or IT call centres. There is good article in Mother Jones magazine of even IT Software decline in India as well as an impending food shortage or famine. Iran will be stuck with an increasingly worthless currency and not too many options of goods to trade bilaterally. Iranian negotiators must stick to a swap for a stronger basket of mixed currencies, which India can organize. They could be Yuan, Yen Won (South Korean)or even the under pressure Euro, which the Germans and French would not let collaspe. Trade with India is always high risk. The Chinese who have a much larger economy are also very wary of trade with India.

Anonymous said...

A disaster for Iran as Iran will have to go and look for other clients now. A fascinating example of how effective the sanctions are biting into Iranian economy.

Anonymous said...

World and Irans problems start and end with Israel.

Its their doing that these choots are misbehaving.

Choots are worse than Arab back stabers, they worship cows for Gods sake.. what do u expect of such a nation.. Iran should learn who its friends are now for after the Israeli problem is solved.

Anonymous said...

Nader, this does not represent a major blow for Iran.

Iran already buys goods from India using its forex reserves. Now it can use Rupees directly and whatever surplus rupees Iran has can be exchanged for other currencies.

In fact i would say it is a victory as Iran does not want to sell its oil in Dollars and Euroes are going to collapse soon.

You make a false claim that makes no economic sense and people actually start believing it.

Another point to consider: Now America has even less leverage on India and India can start negotiating to buy gas from Iran also using Rupees.

Anonymous said...

"It is effectively a barter trade of oil for tea (and other goods)."

That's not true at all. They are getting letters of credit from Indian banks, whose use is limited only by the recipient's respect for the Indian bank. There is no reason to doubt the Indian bank's ability to pay, so these can be used on any Indian product as well as any product across the world. Further, the type of currency in no way impacts the price paid for the item because all currencies are exchangable on liquid markets.

Your commentary comes off as really uneducated.

Anonymous said...

How's this a loss for Iran in anyway I don't understand? If anything, the unos is on India to find a solution to this problem they've found themselves in. In my elementary school business, if someone owes me money, it's his problem to find ways and means of paying me - Not the other way round.Someone please correct me if I'm wrong.

India wants Iran's oil but is under a lot of pressure from the US/Saudi Arabia not to buy Iranian oil. But they see this as a strategic mistake as dependence on Saudi Arabian oil has become too risky in that the "kingdom" can explode/implode any moment from popular uprisings(now in Yemen and Bahrain and coming) to succession of the current king, whose almost on his death bed.

If anything, it's another non-dollar based trade the in a small way, chips a little value away from the dollar.

There,my two cents..

Nader Uskowi said...

When you sell oil, you want to get hard currency in return. Then you decide what to do. How much of the hard currency you want to keep in foreign reserves, how much you want to spend on imports, and from where and what.

Now look at this reported deal (although unlike your enthusiastic comments in its favor, the Iranian authorities have not yet confirmed or accepted it, and I hope they never do accept it). You sell oil, you get L/C in the rupee. The currency is not as easily convertible worldwide, not at the level of the oil trade, approaching $12 billion annually. Then you end up buying as much Indian goods as possible and get some Euros if you could not use all the L/Cs in the local market. Needless to say, this would be a rotten deal! Let's hope it never materializes.

Anonymous said...

Why is it a rotten deal?

Iran imports quite a bit from India, and before it was required to buy rupees using its forex reserves. Now it can use rupees directly.

The surplus rupees can be exchanged for other currencies and considering how large the forex trade is, especially for India, you can easily sell the excess rupees for other currencies.

Unless i am not getting something and the line of credit cannot be sold for other currencies and can only be spent in India. I don't think this is the case, but if it is then yes it is a bad deal for Iran, otherwise (if the LC can be sold for other currencies) it is a good solution and in fact if i recall correclty, Iran wants to sell oil to china in exchange for their currency.

Anonymous said...

I did some research and it looks like i was right.

All a letter of credit is is a guarantee that India will pay Iran.

The payment will be in Rupees and this is a good thing for Iran:

1) Iran does not want to trade oil in Dollars - it stopped accepting dollars for payment some time ago.
2) The Euro is at risk of collapsing - Iran badly needs to diversify its forex reserves.
3) America has less leverage on India, and India can buy gas from Iran more easily
4) It can start the precident for other nations to start trading oil in other currencies.

The currency can easily be exchanged into other currencies as the forex market is very liquid (95% of all trades are done by speculators, so it is very easy to find buyers).

Anonymous said...

Every difficulty is an opportunity in disguise for Iran.