Sanctions and Iran’s Trade Deficit

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

Nathaniel Kern, Matthew M. Reed

As the U.S. Treasury gears up to impose new sanctions in 2013, Iran will be looking for ways to rearrange its sources for imports of some $5 billion a year of wheat, corn, soymeal, sugar and rice. As a result, Iran may end up relying less on its single largest source of imports, Dubai, and may increase its dependence on imports from China and South Korea.

With the exception of India, Iran’s oil customers do not export agricultural commodities, while its traditional suppliers do not import Iranian oil. If the Treasury succeeds in its goal of “locking up” oil revenues in countries that import Iranian crude, Iran will find it harder to buy sugar from Brazil, wheat from Australia, or barley from Russia, for example. These new challenges come on top of Iran’s continued loss of oil revenues.

“No Problem” Until April

This month, Finance Minister Shamseddin Hosseini sought to reassure government employees that salaries will be paid through the end of March, when the Iranian year ends. “Because of the sanctions, revenues collected from the country’s oil have dropped by 50%,” Hosseini told the economic daily Donya-e-Eqtesad on December 17. “By managing our resources and revenues, there will be no problem in paying salaries until the end of this year.” As recently as last month, Hosseini was still stressing that sanctions on Iran were hurting the rest of the world more than Iran. Iran’s finance minister also noted that income tax revenue had fallen by 15% as well.

Section 504

The Treasury is gearing up to put into effect a new twist on sanctions, contained in Section 504 of the Iran Threat Reduction Act, which President Obama signed into law on August 10. The law mandates implementation within 180 days of enactment—or February 6.

This new measure would require jurisdictions that have been granted U.S. waivers to keep money their companies pay for Iranian oil in banks in their own countries. Under this provision, Iran would then use that money only for purchases of goods or services originating in those jurisdictions.

Cohen Describes Section 504

Treasury Under Secretary David Cohen explained this new measure during a speech at the Foundation for Defense of Democracies on December 6. “Under the new law,” Cohen said, “as of February 6, 2013—two months from today—any bank in a country that has received a ‘significant reduction’ determination [i.e. a sanctions waiver] that is conducting a transaction with the Central Bank of Iran, or a transaction involving the sale of Iranian oil, can avoid sanctions risk only if it makes its payment into an account at a bank within the country that is purchasing the Iranian oil, and only if those funds are used to facilitate non-sanctionable, bilateral trade between that country and Iran.

“Let me repeat this, because it is complicated—but critically important,” Cohen emphasized. “Even with the reduced sanctions exposure provided by a significant reduction determination, a foreign bank involved in the payment for Iranian oil must ensure that the payment goes to an account at a bank within the country importing the oil, and then is used only to facilitate permissible trade between that country and Iran, in order to avoid the risk of being cut off from the U.S. financial system.“The funds can’t be transferred to a third country; can’t be repatriated to Iran; and can’t be used to facilitate third-country trade.”

Treasury’s Aggressive Tactics

The U.S. reached settlements with three British banks in December 2012 under which it will collect some $3 billion in fines or forfeitures for various infractions of sanctions, many involving transactions with Iran, most of them during the last decade. U.S. banks haven’t been spared, either, with five of them agreeing to a $26 billion settlement over mortgage loans. The Treasury has thus proved its willingness to act aggressively. As Cohen put it, the Treasury aims to “systematically and deliberately undermine the financial strength of those who threaten our national security.” “What we are doing is not a war,” he added. “It is the alternative to war.”

Indian Opportunities

Iran has been stockpiling some of the agricultural commodities it needs to import and is likely to increase its purchases of these from India in particular. Since July, Indian oil companies have deposited 40% of the money they spend on Iranian oil into rupee accounts in India; Iran then uses these accounts to purchase goods and services from India. If the Treasury gets its way, all of the money Indian oil companies spend on Iranian crude will be locked up in Indian banks and then may be used only to buy Indian-origin goods and services.

Since Iran has exported around $12 billion worth of oil to India this year (at 300,000 barrels a day), it may seek $12 billion worth of Indian goods going forward, instead of its previous target of $4.8 billion. Indian exports to Iran totaled just $2.5 billion in 2010.

Indian Wheat

Traditionally, Iran has not bought wheat from India, even though India is a major exporter. But recent reports suggest Iran is now close to a deal to buy 1 million tonnes of Indian wheat at a price of $325-340 per tonne. Iran and India still haven’t settled various contractual issues, including bank guarantees, which national law will govern the deal, and health and safety certifications requested by Iran. The Indians are hopeful these issues can be ironed out. And, given Iran’s predicament and the possibility that more oil revenues will be trapped in India, Iranian authorities should hope so too.

Indian Rice

Iran is on course to buy about $1.1 billion worth of Indian rice this year. Indian exporters of basmati rice were burned by Iranian importers earlier this year when the buyers defaulted on payments. With the rupee facility, however, they have recovered some of their market share at a time when prices are much higher than before, although Iran still has concerns about the presence of various pesticides found in Indian rice.

Soymeal, Maize and Sugar

India is also the world’s fourth-largest soymeal exporter after Argentina, Brazil and the U.S. India expects to sell 1.0-1.5 million tons of soymeal to Iran this season, which could be valued at close to $1 billion. India could also partially supplant Iran’s main sources of maize (Brazil, Argentina, and Ukraine). Iran buys about $1 billion worth of maize per year. Earlier this year, soymeal and maize shortages created a “chicken crisis” in Iran, when the price of chicken skyrocketed with the cost of feedstock.

India is also the second largest producer of sugar in the world, but is unlikely to meet much of Iran’s need because rising prices inside India have made the domestic market more lucrative. India sells some raw sugar directly to Iran, which consumes 1.6 million tonnes of sugar per year, for a total value of $700 million.

All told, Iran could source close to $4.5 billion of these agricultural commodities from India if it overcame various quality and safety issues. But Iran would still be accumulating more than $6 billion in rupee accounts over the next year. It has a better chance of achieving a balance of trade with China, South Korea, and Turkey. It will likely have too much money locked in Japanese accounts and not enough for imports from the UAE.


Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.

  • Middle East Policy

    Middle East Policy has been one of the world’s most cited publications on the region since its inception in 1982, and our Breaking Analysis series makes high-quality, diverse analysis available to a broader audience.

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