U.S. Sanctions on Iran Negatively Impact Tea Trade

Iranian tea farm

U.S. sanctions imposed on Iran are causing a sharp downturn in the tea trade. Renewing sanctions in recent weeks, and threatening the central banks of U.S. allies, has caused Iran’s currency to nosedive, unemployment to increase, and inflated prices for tea and sugar.

Iran produces only a fraction of the 120 million kilos of tea it consumes annually, making it dependent on imports that are traded in U.S. dollars. Iran was the world’s fifth largest tea importer in 2017, behind 4th ranked U.K. The country imported 3.9 percent of the world total at a cost of $283.8 million according to World’s Top Exports. The U.S. ranks third, purchasing 6.7 percent of the word’s total and paying $486.80 million in 2017.

Impeding financial transactions crippled the nation’s tea trade in 2012. The new round of sanctions imposed this month includes a U.S. threat that may lead to financial restrictions on other countries that continue to trade with Tehran. This makes Iran’s largest tea trading partners in India, Sri Lanka, and Kenya vulnerable. Last year India supplied Iran with 29 million kilograms of tea worth about $30 million. Sri Lanka exported 27 million kilograms and Kenya supplied 20 million kilograms. An unknown amount, estimated at several million kilograms, was smuggled into the country.

Tea exports are not banned, the U.S. simply intends to prevent financial circumventions from occurring. It is unlikely to go so far as a blockade.

To circumvent sanctions in 2012 India established a rupee-based trade in which the UCO Bank of India arranged for Indian companies to receive payments for tea exports exchanged for Iranian oil.

Iranian tea farm

A high-level delegation of Indian government and trade executives is scheduled to visit India the third week of October to explore a similar work-around. The hope is that tea will be included on a “priority list” of traded items that includes pharmaceuticals, rice, and other essential commodities, according to Azam Monem, chairman of the India Tea Association. He told the Economic Times, “We have sought a special exchange rate for tea whereby the Iranian buyer can buy tea paying lesser rials.”

Sri Lanka is considering paying its oil debt with tea. Tea officials there said shipments of tea could offset what is owed for Iranian oil. The Iranians quickly dismissed the idea in the Tamil Guardian, noting that Sri Lanka owes $250 million for oil, “900 times as much as Iran’s entire tea import bill.” A spokesman for the Iran tea organization Goudarz Khordadpour, said that tea imports would not exceed 55,000 metric tons, worth approximately $275,000.

Last week the East African Tea Traders Association (EATTA) called for government intervention to sustain exports to Iran.

“Most banks will now be shy to transact money coming in from Iran and this will impact negatively on trade. We want the Central Bank of Kenya (CBK) to come up with modalities that will ease payment so that we do not lose out on this market,” EATTA managing director Edward Mudibo told the Nation.

In the six months ending June 2018 Kenya sold $5.7 million (Sh575 million) worth of tea to Iran. Local banks continued to service accounts, but Iranian buyers will find it increasingly difficult to secure dollars. They are currently $1.2 million in arrears, according to a report in The Nation. Annually Kenya sends Iran about 20 million kilograms, a number that could greatly decline as sanctions take full effect in November.

Reserve currency dominates trade

Since the end of World War II, the dollar has been the bedrock of world trade. The stability of a reserve currency is a marked advantage for those who trade, invest, and conduct transactions. Consider the plight of those holding Turkish lira as its value declined in recent weeks to record lows, becoming the world’s worst performing currency. A tea trader purchasing $1,000 worth of tea for what he thought would cost 2,500 Turkish lira ($0.16), would have paid 5,980.50 lira last week on settlement. Traders are trying to retain value without using U.S. dollars as the Iranian currency fluctuates.

Iranian tea factory

Iran grows 5 percent of the tea it consumes annually. Sanctions normally boost local output, and that happened to some extent during 2013-15, but as equipment failed over time Iran’s tea factories resorted to stripping parts and relocating machinery from less efficient factories to keep processing tea. Eventually fewer than half of the nation’s 104 factories remained in operation. Production fell to 14,000 metric tons by 2015. In 2015 as sanctions were lifted, estates and factories began to rebuild but that process is not complete. Last year 150 factories were producing tea, but at roughly half capacity. In 2016 the country produced 19,600 metric tons. Last year the government purchased 31,200 metric tons of dried tea, according Mohammad Vali Rouzbehan of the Iran Tea Organization.

Ebrahim Jamili, president of the Iran-India Tradesmen Council, said domestically grown tea is not publicized and promoted properly. He said that he hopes the turmoil will be a call to action to promote Iranian-made tea to help the domestic sector grow. Iran teas are grown at higher altitude and use no pesticides. The extreme cold terminates most pests and the rest are dealt with through biological methods. As such, Iranian tea is considered organic. This gives us an edge [in international markets],” said Rouzbehan.

Source: The Nation, Tamil Guardian, Financial Tribune, The Economic Times