New sanctions on Iran disrupt food imports

Published Feb 12, 2012


Niluksi Koswanage and Parisa Hafezi Kuala Lumpur/Tehran

More evidence emerged this week of the crippling impact of new sanctions on Iran, with international traders saying Tehran is having trouble buying rice, cooking oil and other staples to feed its 74 million people weeks before an election.

New US financial sanctions imposed since the beginning of this year to punish Tehran over its nuclear programme are playing havoc with Iran’s ability to buy imports and receive payment for its oil exports, commodities traders said.

Iran denies sanctions are causing serious harm to its economy, but investigations in recent days with commodities traders around the globe show serious disruptions to its imports. That is having a real impact on the streets of Iran, where prices for basic foodstuffs are soaring.

South Korean President Lee Myung-bak was in Saudi Arabia on Tuesday, the latest leader of a major Asian oil-importing country to visit the Middle East, seeking alternative sources of oil as sanctions make it more difficult to import from Iran.

Traders in Asia said on Tuesday Malaysian exporters of palm oil – the source of half of Iran’s consumption of a food staple used to make margarine and confectionary – had halted sales to Iran because they could not get paid. That followed news on Monday Iran had defaulted on payments for rice from top supplier India, and news last week that Ukrainian shipments of maize had been cut almost in half.

Rice is one of the main staples of the Iranian diet. With the rial currency plummeting, prices have more than doubled to $5 (R38) a kilogram at bazaars in Iran from about $2 last year. Maize is used primarily as animal feed, and the cost of meat has almost tripled to about $30 a kilo, beyond the budget of many middle-class Iranian families.

The measures have had a dramatic impact on daily life in the country ahead of a March 2 parliamentary election that will pit supporters of hardline President Mahmoud Ahmadinejad against opponents seen as even more conservative.

Reformists are barely represented in the election, which is being seen as a referendum on Ahmadinejad’s economic policies that have seen subsidies for basic goods cut and replaced with direct payments to families.

Next month’s election will be Iran’s first since a presidential vote in 2009, when a disputed victory for Ahmadinejad triggered eight months of violent protests. The authorities put the revolt down by force, but since then the Arab Spring has shown the vulnerability of governments in the region to anger fuelled by economic hardship.

Traders in Malaysia’s capital Kuala Lumpur said palm oil shipments to Iran had largely been halted since late last year, after US and European sanctions made it difficult for buyers to obtain letters of credit and make payments via middlemen in the United Arab Emirates (UAE).

A margarine factory owner in Iran, who asked not to be identified, said there was a shortage in supply of the oils needed to make margarine that could halt production soon.

A default by Iranian buyers on purchases of 200 000 tons of Indian rice can be more crippling. The average Iranian eats 40kg of rice a year, 45 percent of which is imported, the US Department of Agriculture said. India is the main supplier.

The president of the All India Rice Exporters’ Association said it was advising exporters to stop selling rice to Iran with the customary 90 days credit for payment.

Iranian buyers normally pay for Indian rice through middlemen in the UAE, but falls in Iran’s rial means buyers have trouble covering the cost in hard currency.

While it is too early to talk of hunger from the rising prices of food in Iran, international organisations are keeping an eye out for a sign of hardship. UN World Food Programme spokeswoman Gaelle Stevenier said the agency was “monitoring” the situation.

The ultimate hammer blow to Iran’s economy could come in the next few months if it becomes unable to sell the 2.6 million barrels of oil a day that it is accustomed to exporting, or it is forced to offer such steep discounts that its revenue shrivels.

While Iran has a more diverse economy than other big oil exporters in the Gulf, energy exports are still its main source of earnings to buy food and other necessities.

Top oil exporter Saudi Arabia has promised to make up for any shortfalls if countries stop buying Iranian crude.

South Korea’s Lee this week became the latest Asian leader to visit Saudi Arabia in search of additional oil supplies to replace possible cuts of oil from Iran.

Japan and China’s leaders have also visited in recent weeks.

Korea bought 87 percent of its oil from the Middle East last year, including 9 percent from Iran.

Where Iran is still able to sell oil, it has difficulty getting paid, or exchanging payment from the buyer’s domestic currency into dollars to use for international trade.

South Korea owes Iran’s central bank about $5 billion for crude oil imports, but the money is trapped in the Korean banking system because of US sanctions.

The EU, which bought about a fifth of Iran’s oil exports last year, has announced a total embargo over the next six months.

China, which also bought about a fifth of Iran’s oil last year, is demanding steep discounts to keep doing business with Tehran, and has cut its imports by more than half over the first three months of this year.

A senior executive of a US oil company said Saudi exports had risen by 200 000 barrels a day, mostly to Asia, making up for most of the decline in China’s imports of Iranian oil. China had also been increasing its purchases from Russia and West Africa, oil traders said.

Traders said China was likely to cut its purchases of Iranian iron ore as well, worth $2bn a year.

The sanctions have been imposed to halt Iran’s nuclear programme, which the West believes is being used to develop a nuclear bomb. Iran’s leadership says the nuclear programme is peaceful, and it is willing to endure sanctions to maintain it as a national right.

Last month, Iran took the important step of beginning production of highly enriched uranium at a new facility hidden deep under a mountain, where it would be difficult for US or Israeli warplanes to destroy.

Talks between Iran and the West over the nuclear programme broke down a year ago. Iran has repeatedly said it wanted to restart the talks, but had refused Western demands that its uranium enrichment be up for negotiation.

As the sanctions have tightened, Iranian officials have made repeated threats of military strikes against Mid-East shipping and the US, which protects the Mid-East oil trade.

In the latest threat, Interfax quoted the Iranian ambassador to Russia on Tuesday as saying Iran could strike US military forces anywhere in the world. – Reuters

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