A Very interesting analysis of how US and EU sanctions on IRAN affects Pakistan

AsifAmeer

Siasat.pk - Blogger
403888-iranoilsanctions-1341451665-734-640x480.jpg


http://tribune.com.pk/story/403888/analysis-how-us-and-eu-curbs-on-iran-affect-pakistan/


Once again, a great article by Farooq Tirmizi


By Farooq Tirmizi
Published: July 5, 2012

KARACHI: For all the talk of a rift between Pakistan and the US, the Pakistani reaction both that of the government and the countrys businesses to sanctions against Iran suggests that Pakistan firmly intends to stay within the global economy dominated by US and European rules.


The sanction imposed by the United States and the European Union to pressure Tehran into giving up its nuclear programme primarily target the Iranian oil industry, but they do it by using the financial system. The US Federal Reserve, the Bank of England, and the European Central Bank have essentially banned any financial transactions with Iran for banks that fall within their own jurisdiction. How does this affect Pakistani banks? They can either choose to conduct transactions with Iran, or they can choose to continue dealing in dollars, pounds and euros. Which do you think they will choose?

Virtually all global trade across borders takes place in either US dollar or euro-denominated contracts. To lose the ability to transact in these currencies means to lose the ability to finance any of Pakistans exports or imports, not just those going in and out of Iran. (For nearly all international trade transactions, even if the buyer has the cash in advance, the transaction goes through banks.)

And this reflects an important point: for all the recent talk of Western decline: New York and London remain the capitals of global finance, giving the US and British governments enormous power over the world economy, should they choose to exercise it.

Of the Pakistani banks, only National Bank and Habib Bank have branches in Iran, but these banks are very unlikely to actually use their presence in Tehran to finance trade between Pakistan and Iran, forcing any parties still interested in doing business with Iran to do so in cash. This necessarily limits the amount of money that can be involved in such transactions, since it is both inconvenient and dangerous to carry around millions of dollars in banknotes of any currency.
There are many Iranian banks that have not been blacklisted, but there is an unwritten ban on facilitating any trade activities between Pakistan and Iran, said Safdar Hussain, vice president of the Rice Exporters Association of Pakistan.

In many ways, however, Pakistan has already begun implementing the sanctions against Iran. Pakistans imports from Iran fell by 66% in 2011 to just $304 million, compared to $884 million in 2010. The drop in oil imports is even more dramatic: Iran was Pakistans fourth biggest supplier of oil in 2008, behind the United Arab Emirates, Saudi Arabia and Kuwait. [MENTION=28031]Aleph[/MENTION] In 2011, that rank slipped to 20th. At this point, Pakistan can completely eliminate Iranian oil imports by increasing shipments from the UAE by just 0.6% per year.

The worry for most Pakistani businesses is on the export side. Pakistans exports to Iran were worth $426 million in 2008, but have since dropped to just $153 million in 2011. Rice constitutes about half of all Pakistani exports to Iran, and the rice exporters association has been extraordinarily frustrated by the attitude of the banking system towards Iran.

Food items are exempt from sanctions. But our banks are interested in being more loyal than the king, said Hussain.
Sources said that the State Bank of Pakistan appears to have gone back on its commitment to help rice exporters find a way to conduct transactions with Iran, without violating the sanctions.

However, this would involve transacting directly between Pakistani rupees and Iranian riyals. The Iranian riyal has plunged in value by over 40% during the past year and a half, and looks set to keep on dropping. In addition, it is a highly illiquid currency, meaning that Pakistani banks would essentially be sitting on worthless paper to finance transactions on which they would not be able to charge a high enough risk-premium without triggering a customer backlash.

It is likely that the banks and the government feel that exports to Iran are not worth getting bothered over. The country accounts for only about 0.6% of all goods exported by Pakistan. That seems too small a number to lose the ability to transact in dollars and euros over.

Published in The Express Tribune, July 5[SUP]th[/SUP], 2012.
 

mrk123

Chief Minister (5k+ posts)
[MENTION=24375]AsifAmeer[/MENTION], do you think we could have used this situation to our advantage? Would barter trade be feasible?
 

Unicorn

Banned
[MENTION=24375]AsifAmeer[/MENTION] why the barter option is not considered with Iran? I am a bit surprised may be you can elaborate
 

AsifAmeer

Siasat.pk - Blogger
@AsifAmeer, do you think we could have used this situation to our advantage? Would barter trade be feasible?

@AsifAmeer why the barter option is not considered with Iran? I am a bit surprised may be you can elaborate

I thought to myself the SAME question and then i realized this very simple problem with barter. Notice that there are rice exporters ready to export RICE. Lekin in return they will be paid in CRUDE OIL or marble.. or whatever. Lekin the RICE exporters need RUPEE to pay off its employees, farmers, custom duties, traders, and banks NOT in Crude Oil, but in RUPEE. See my point? Normally, a bank would step in, Finance Oil from Iran and finance Rice from Pakistan and sell those Oil and Rice notes (loans) in their respective commercial and futures markets. Right now those markets in Iran are ill-liquid.

Is ka hal yahi hai jo mein ne "We Make it the Mighty Dollar" may propose kiya hai. Iran should sell Crude to Pakistan. In return, Iran should ask Pakistan to buy its RIYAL from the forex market. This will stop the RIYAL bleeding in the forex market because now there is a sovereign buying of its currency to settle the Balance of Payment.
 

mrk123

Chief Minister (5k+ posts)
I thought to myself the SAME question and then i realized this very simple problem with barter. Notice that there are rice exporters ready to export RICE. Lekin in return they will be paid in CRUDE OIL or marble.. or whatever. Lekin the RICE exporters need RUPEE to pay off its employees, farmers, custom duties, traders, and banks NOT in Crude Oil, but in RUPEE. See my point? Normally, a bank would step in, Finance Oil from Iran and finance Rice from Pakistan and sell those Oil and Rice notes (loans) in their respective commercial and futures markets. Right now those markets in Iran are ill-liquid.

Is ka hal yahi hai jo mein ne "We Make it the Mighty Dollar" may propose kiya hai. Iran should sell Crude to Pakistan. In return, Iran should ask Pakistan to buy its RIYAL from the forex market. This will stop the RIYAL bleeding in the forex market because now there is a sovereign buying of its currency to settle the Balance of Payment.

Maybe its a stupid question - but why can't the barter happen at the government's level? Say Pak government buys the rice and iranian government pays in oil for the rice ......this way the problem of trade deficit will be solved.
 

bhaibarood

Chief Minister (5k+ posts)
I thought to myself the SAME question and then i realized this very simple problem with barter. Notice that there are rice exporters ready to export RICE. Lekin in return they will be paid in CRUDE OIL or marble.. or whatever. Lekin the RICE exporters need RUPEE to pay off its employees, farmers, custom duties, traders, and banks NOT in Crude Oil, but in RUPEE. See my point? Normally, a bank would step in, Finance Oil from Iran and finance Rice from Pakistan and sell those Oil and Rice notes (loans) in their respective commercial and futures markets. Right now those markets in Iran are ill-liquid.

Is ka hal yahi hai jo mein ne "We Make it the Mighty Dollar" may propose kiya hai. Iran should sell Crude to Pakistan. In return, Iran should ask Pakistan to buy its RIYAL from the forex market. This will stop the RIYAL bleeding in the forex market because now there is a sovereign buying of its currency to settle the Balance of Payment.
the
sir under the current sanctions even barter trade would be not allowed!!!specially for weak countries life pak,for india new exceptions will be created!!
 

golmaal

Banned
IF Pakistan ever think of striking down US drones, it should first try to have a good relationship with Iran. At the moment we are too much depend on US and EU for all our exports.

We need to form an Asian block including (India,) China, Iran and Russia to make ourselves stronger and free from influence of US policies
 

golmaal

Banned
Maybe its a stupid question - but why can't the barter happen at the government's level? Say Pak government buys the rice and iranian government pays in oil for the rice ......this way the problem of trade deficit will be solved.

The govt. cannot do everything. Most of the work has to be done by the people themselves
 

mehwish_ali

Chief Minister (5k+ posts)
I think both Barter trade and Gold Trade is possible. But in both cases, Governments of both sides have to take the initiative (actually both governments are heading towards this, but it always take some time).

I thought that Iran was already buying a lot of Food Stock from Pakistan due to the fear of possible war with US.


http://www.aaj.tv/2012/05/pakistan-iran-wheat-barter-to-be-finalised-by-12-may/

[h=2]Pakistan, Iran wheat barter to be finalised by 12 May[/h]By: Fawad Khan, Uploaded: 5th May 2012



pakIran1.jpg
Pakistan and Iran are likely to finalise barter deal by May 12, 2012, according to which Pakistan will export one million tons of wheat at international price plus $12-15 per ton in urea exchange, official sources told Business Recorder.

However, Iran has refused to buy refined sugar from Pakistan, saying that it needs only raw sugar.
On Friday, Minister for Water and Power, Syed Naveed Qamar, presided over a high level meeting and directed PASSCO to finalise the modalities for export of one million tons of wheat to Iran on the basis of talks held at Tehran between Pakistani and Iranian authorities last month.
Qamar is the head of a sub-committee of ECC constituted to oversee export of surplus wheat and rice to Iran. Wheat’s international price hovers around $270-275 per ton.
According to the Minister the government has already taken a principle decision to export one million tons surplus wheat from PASSCO stocks, besides export of rice under barter trade arrangement.
“Pakistan had offered to dispatch wheat consignments through land route but Iran did not agree with the proposal saying that wheat should be sent through sea,” the sources maintained.
Iran has expressed its desire to import both the items from Pakistan and in exchange urea will be imported from there. He was of the views that the modalities should be finalised at the earliest so that first tranche of Wheat may be exported and urea imported. Timely import of urea from Iran will benefit the farmers as Kharif season is starting shortly.
Earlier, the Secretary National Food Security, Shafqat Naghmi, briefed the meeting on the details of their meeting with Iranian authorities held last month and stated that the wheat would be exported and urea would be imported via sea. Pakistan will import the urea quantity against the total price of wheat to be exported to Iran.
The Minister of Water and Power said that the formal approval will be taken from ECC next week to export the commodity. —MUSHTAQ GHUMMAN

 

lafatah

Minister (2k+ posts)
yaar its clearly not about the mode of payment but political will...

waisay zardari pay ****** hai...PPP generally improved ties with Iran leken yeh sala kisi kaam ka nahi hai...aur humari fauj ko ab uniform change kar lena chahiye...yeh darmay bazi bhi khatam ho aur US marines ban kay ghoomay
 

mrk123

Chief Minister (5k+ posts)
Well, thats the whole point of discussion. Its almost impossible to do this at a business to business level with the restrictions in place. I agree that we shouldn't get the governments involved in everything but here is an example where governments are the ONLY ones who have the power and resources to the work around a difficult situation.

The govt. cannot do everything. Most of the work has to be done by the people themselves
 

golmaal

Banned
Well, thats the whole point of discussion. Its almost impossible to do this at a business to business level with the restrictions in place. I agree that we shouldn't get the governments involved in everything but here is an example where governments are the ONLY ones who have the power and resources to the work around a difficult situation.

Really but the business deals should to be made by local companies and govt. should work only as a facilitator.
 

mrk123

Chief Minister (5k+ posts)
As I said - in an ideal world and in an ideal situation that's how things should work. However, in this not so ideal situation some unique and innovative ways to do business need to be explored.

Really but the business deals should to be made by local companies and govt. should work only as a facilitator.
 

AsifAmeer

Siasat.pk - Blogger
Why Not Pay in Pure Sona (Gold) ??? American thugs are dancing to Israeli songs..
State Bank of Iran nor the State Bank of Pakistan would have enough Gold to trade all their imports/exports. Gold prices are hugely distorted in the global markets and Gold cannot be used as a medium of trade because of its distorted global prices. (Gold's way underpriced)


Maybe its a stupid question - but why can't the barter happen at the government's level? Say Pak government buys the rice and iranian government pays in oil for the rice ......this way the problem of trade deficit will be solved.
Couple of issues with that.
1. Govt hasnt budgeted for buying Imports from Iran.
2. Even if Govt buys Oil from Iran. It may not have the right channels to sell Oil in the Pakistan Oil Markets. Think futures markets. And suppose, even if the Govt does, the sheer volume of Oil/Currency/Gold trade in the financial markets of Iran/Pakistan would jolt the financial market's liquidity and add huge volatility unless it planned and done with baby steps.
3.Any time govts get involved in buying/selling, you have corruption. Govts will sell oil to its warmest friends in both countries, failing the whole purpose of "affordable products"
4. Suppose Pakistan buying 50 million tonnes of Oil but the market needs 45 million. Then there is a waste or over-allocation of resources. Same with buying less oil.


I see a major role of Iran and Pakistan's central banks working together to boost their currencies and facilitate trade. Let businesses trade Oil and rice as they see fit or as the prices dictate. and leave the financing of currencies to the respective central banks. I think thats manageable.


I think both Barter trade and Gold Trade is possible. But in both cases, Governments of both sides have to take the initiative (actually both governments are heading towards this, but it always take some time).

I thought that Iran was already buying a lot of Food Stock from Pakistan due to the fear of possible war with US.



Really but the business deals should to be made by local companies and govt. should work only as a facilitator.
How do u define local companies? Is McDonalds foreign or local? Is MCB or Habib bank foreign or local? Viewing trade thru the colors of Nationalism can really distort economic views...
 

golmaal

Banned
State Bank of Iran nor the State Bank of Pakistan would have enough Gold to trade all their imports/exports. Gold prices are hugely distorted in the global markets and Gold cannot be used as a medium of trade because of its distorted global prices. (Gold's way underpriced)

Why not? Even US currency is volatile these days. We could just keep some Gold reserves like we store Forex reserves. Gold prices may seem capricious because of huge worries of economic meltdown. IMO it is the other way around, our currencies are volatile which makes the Gold prices go up and down. But really it is up to the government to agree on such a medium of exchange and not look at it as a commodity (which is the standard albeit incorrect model). And usually countries trade using dollars which goes up and down so why not gold?
 

AsifAmeer

Siasat.pk - Blogger
I understand where you coming from. And I share your views too. Lekin after I took a detour of "financial leverage" and the role of banking in the modern money, Gold is just as infected.

Lekin lets assume for a moment that Iran and Pakistan start to use Gold as currency.

Pakistan uses 2 million tonnes of crude every year.
With Oil at $98 & gold at $1580, you are looking at a monthly bill of 2.2TONNES of Gold transfer to Iran every MONTH.
With mere 65 tonnes of Gold in reserves at the SBP, wont be long before Pakistan is completely out of GOLD.


Lekin Gold use na karen ki eak aur wajeh bhi hai. Govts dont wanna hand over their monetary powers to anyone.. even Nature!


Why not? Even US currency is volatile these days. We could just keep some Gold reserves like we store Forex reserves. Gold prices may seem capricious because of huge worries of economic meltdown. IMO it is the other way around, our currencies are volatile which makes the Gold prices go up and down. But really it is up to the government to agree on such a medium of exchange and not look at it as a commodity (which is the standard albeit incorrect model). And usually countries trade using dollars which goes up and down so why not gold?