Barter trade agreement between Sri Lanka and Iran to hit India's tea exports to West Asian nation

India's tea exports to Iran, which have halved compared to the pre-pandemic period in 2019 due to payment problems, are set to take a further hit this year as Sri Lanka has entered into a barter trade agreement with Iran to pay off its earlier debts against oil purchases.

Sri Lanka will send orthodox tea or whole leaf teas to Iran to pay off its oil purchase dues. Iran buys orthodox teas only for its domestic consumption and India has been one of the biggest suppliers of orthodox teas to the West Asian nation.

In 2019, India had exported about 53 million kg of teas to Iran. Tea exports to Iran plunged to 29 million kg in 2020 and fell to 21 million kg in the first ten months of 2021 due to the payment crisis.

“The barter trade agreement between Iran and Sri Lanka put India in a disadvantageous position. Exports to Iran may further come down by 15% in 2022,” said Mohit Agarwal, director of Asian & Tea Exports, which exports tea to Iran.

A senior industry executive, who did not wish to be identified, said, “India was the largest tea exporter to Iran before the US sanctions, but after that the rupee-rial trade with Iran came to a grinding halt.”
The United Nations had imposed sanctions on Iran a few years ago but allowed Iran to import food products like tea, and India to import petroleum products. Later, India and Iran agreed on a Vostro payment mechanism, through which a portion of oil import proceeds was converted to rials and then to rupee. UCO Bank was authorised to deal with all payments in rupee. Gradually, India established itself as the largest tea exporter to Iran, replacing Sri Lanka, which did not have any special payment mechanism in place with Iran.
The system was severely affected when the US imposed further restrictions on Iran and oil imports were stopped after May 2019. The Vostro account thus shrank and since end-2019 payments were severely affected. The Central Bank of Iran restricted rupee allocations and all payments were delayed for a long time.
“The situation is unlikely to improve unless India starts importing oil from Iran. As of now, there is no clarity on the issue,” said Agarwal.

India’s tea exports in the first 10 months of 2021 fell 8.7% year-on-year to 157.20 million kg and the figure is unlikely to have crossed 180 million in the entire 2021, according to industry executives.