[blurb-capmind-prem]
Iran has entered into a deal with the US and other powers, allowing it some leeway on previously imposed sanctions in exchange for curtailing its nuclear activities.
Under the deal, Iran must improve cooperation with United Nations monitors, commit to eliminate its stockpile of uranium enriched to 20 percent levels and halt advanced centrifuge installation, the White House said in a statement. Iran also won’t commission its heavy water reactor at Arak, which, if it became operational, could produce plutonium and give the country a second path to nuclear weapons.
In return, Iran will be able to repatriate $4.2 billion in frozen assets, the Obama administration said. The accord will “suspend certain sanctions on gold and precious metals, Iran’s auto sector and Iran’s petrochemical exports, potentially providing Iran approximately $1.5 billion in revenue,” the administration said.
Many Iranian assets held outside the country – in bank accounts in other countries – had been frozen after the sanctions. These have been freed, to a certain extent. The country can trade in gold but might not be able to take payment in gold for oil.
How it affects India
The agreement has implications for India, which once had Iran as the second largest source of oil imports. This position has fallen in recent years, due to the sanctions. India and Iran were moving closer to having oil imports paid for in rupees. In exchange, Iran would buy a lot of basmati rice, wheat, corn and sugar from India – largely because it could do nothing else with those rupees (India doesn’t have capital account convertibility so they can’t give those dollars to someone else).
Till recently, India would buy oil (and other things) from Iran, and pay 55% in foreign currency, and 45% in rupees, all of it stored at UCO bank. The dollars couldn’t be sent to Iran due to sanctions.
Tejinder Narang talks about the potential impact of such a deal, in the context of the Indian exporter to Iran (Hindu):
If trading restrictions are phased out or tapered by the US orEU, it stands to reason that Iran will undertake business on a competitive basis. Indian basmati rice will be pitted against aromatic varieties of Thailand and Pakistan.
Soymeal, corn, and raw sugar will meet the challenge of South American and Black Sea prices.
The base of business will shift back to Dubai from Tehran. Iranian trading companies will compete with new/old private players based in Dubai. Preferential treatment to India will end forthwith.
What this means is – we compete, and in all likelihood, we lose because we’re not the only ones out there that Iran can buy from, after this deal.
There are pluses of course. We can now remit the rupees, so we can potentially get more oil from Iran. This is what has driven up stocks like BPCL, HPCL and MRPL 5%. However, it’s quite likely that Iran chooses to ship out to others than can remit in dollars entirely after this deal; because it has more freedom in using dollars than in using rupees, a restriction India has put on them (because of lack of capital account convertibility).
Shippers suffered as they couldn’t insure their ships bringing oil from Iran. Now they can, ostensibly, with sanctions eased.
Brent crude prices have fallen about 2% after the deal’s announcement. However this is too small to matter, with Brent still at $109. We need Brent to fall below $100 to counter the major fall in the Indian rupee, and thus keep our oil bill more or less the same.
Watch Out For The Rupee-For-Oil Trade Breaking Down
The positives are frontline news but the derailment of the rupee-for-oil deal with Iran is the biggest threat for India. Without that, there’s an additional $5 billion of outflow to Iran, which, if not paid in rupees, will have to be bought from the market.
RBI does have an open swap with oil refiners, helping them avoid the market completely as they buy dollars directly from RBI (on the promise that they will, within three months, buy back the dollars from the market – those three months will undoubtedly be extended). This will help the rupee for the next couple of months, while RBI walks on eggs with all that swapping.
Stocks went up 2% today, as the world rejoiced along with the steroid of cheap money stimulus.
The impact of this deal on the currency and it’s trade implications will hit us only in the Jan-Mar 2014 quarter. Though much of the positives will be rolled back should Iran do something really stupid like test a nuclear device. The trade impact will be best on the shippers, like SCI or Mercator lines, if they move to shipping oil from Iran.
