MUMBAI BUSINESSES FINDING NEW MECHANISMS FOR TRADE WITH

C O N F I D E N T I A L SECTION 01 OF 04 MUMBAI 000311

SIPDIS

TREASURY FOR OFAC
LONDON FOR GAYLE; BERLIN FOR PAETZOLD; BAKU FOR MCCRENSKY;
BAGHDAD FOR BUZBEE AND FLINCHBAUGH; DUBAI FOR IRPO ;

E.O. 12958: DECL: 7/28/2019
TAGS: EINV ECON EFIN PGOV ETRD ETTC EIND KCRM IR KS
IN
SUBJECT: MUMBAI BUSINESSES FINDING NEW MECHANISMS FOR TRADE WITH
IRAN

REF: A. MUMBAI 000272

B. 2007 COLOMBO 000676

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CLASSIFIED BY: Michael Newbill, Consul for Economic and
Political Affairs, Pol/Econ, State.
REASON: 1.4 (e)

1. (C) Summary: While large Indian conglomerates are wary of
investing in Iran, Mumbai's small and medium size trade
companies continue to do business with their Iranian
counterparts, explaining the 42 percent increase in India's
non-petroleum and non-crude oil trade with Iran in the last
year. In the month of June, ConGenOff met with a wide array of
business owners in Mumbai (India's commercial center) who trade
with Iran and participate in numerous trade delegations
sponsored by trade associations in both countries. Discussions
with these contacts reveal that even in light of sanctions
against Iran, and the stigma it carries, Mumbai businesses are
still exploring new bilateral trade opportunities with Iran.
Moreover, members of Mumbai's business community are finding new
mechanisms to side step obstacles, such as finding third parties
like South Korean banks, to absorb the risk of Iranian letters
of credit. End Summary.



NON-PETROLEUM TRADE BETWEEN INDIA AND IRAN ON THE RISE

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2. (SBU) Figures from India's Export Import Data Bank indicate
that Indo-Iranian trade in key industries (not including
petroleum products and crude oil) has already increased by 42
percent in just the last year. From 2007-2008, India's exports
to Iran increased 34 percent, with goods such as black tea,
coffee, black pepper, basmati rice, textiles, office supplies
(stationary),pharmaceuticals such as antibiotics, sugar,
machinery for manufacturing fiber pulp, parts of central heating
boilers, yellow fin tuna, and bird's eggs experiencing the most
growth. Imports from Iran during the same time period increased
43 percent, including the largest increases in paper board,
finishing agents, animal hides, carpets, ores, drinking glasses,
fruit juices, gifts and almonds. A number of trade forecasters
predict trade with Iran will triple within the next five years
although it currently remains a small share of India's total
trade (3.1 percent).




3. (SBU) According to a number of business owners in Mumbai, the
demand for Iranian goods is strong, despite rising costs which
could impact market share. There are some goods, however, which
continue to be in high demand on the Indian economy no matter
what the cost. For instance, in discussion with various nut and
dried fruit vendors, the price of "Mamra Almonds," also known as
Iranian almonds, has skyrocketed in the last six months, due to
inflation in Iran. However, while American and Afghani almonds,
and even some domestic varieties are gaining popularity, the
Indian demand for the Iranian almonds continue to rise due to a
cultural belief that they help in the development of children's
brains, more so than other almonds. From 2007-2008 the total
import of almonds into India actually fell 35 percent, but the
share of Iranian almonds in the market rose from 21 percent to
33 percent according to the Export Import Data Bank.




4. (C) According to Rais Shaikh (please protect),who returned
from a trip to Iran in June 2009 (Ref A),the Commercial Attachi
at the Iranian Consulate in Mumbai has a strong presence in the
business community, also contributing to increased trade
relations. Shaikh, a successful businessman in Mumbai, told
ConGenOff that he is especially impressed with the work and
organization of the Commercial Attachi in Mumbai, whom he had
not expected to be so orderly and efficient. The Commercial
Attachi pointed Shaikh to new manufacturers of "float glass" in
Iran, which he plans to import for clients in Mumbai. He said
float glass is increasingly being used in Mumbai for the glass
exterior of buildings, which is hard to find in India.

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TALES FROM A TRADE DELEGATION TO IRAN

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5. (C) On June 10, ConGenOff met with Vijay Kalantri (please
protect),President of the All India Association of Industries
(AIAI) and Director of Mumbai's World Trade Centers'
Association, who has hosted Iranian trade delegations for the
last 10 years. Kalantri led a trade delegation to Iran on May
16-30,2008 and met with key ministries and organizations,
including the Chamber of Iran Commerce Industries and Mines
(sic),the Privatization Organization of Iran, Khodro (an
automobile company),and the Trade Promotion Organization.
Their trip followed the visit of a trade delegation from Iran to
Mumbai in March 2008. Kalantri said that their exchanges helped
in the November 2008 signing of agreements and memoranda of
understanding (MOU) between Iran and India. These agreements
included a working plan on agriculture, a sister port
arrangement between Shahid Rashid Port in Iran and Jawaharlal
Nehru Port Trust near Mumbai, and an MOU between India's trade
Promotion Organization and the Iranian International Exhibition
Company.




6. (SBU) Kalantri described the new areas of cooperation his
organization had identified with Iran including banking, civil
aviation, mining, film production, information technology,
animation and entertainment, pharmaceuticals, detergent, and
edible oils. Kalantri confirmed to ConGenOff that while large
industrial investors like Essar and the Hinduja group are
obviously interested in Iran for energy and oil ventures, Indian
importers are increasingly interested in a wide array of Iranian
goods from nuts and saffron, to metal ores and industrial wax.
There is also a growing Iranian interest in Indian exports,
including machinery, pharmaceuticals, basmati rice, and rubber
products. He said that a key industry where India and Iran can
explore cooperation is in the automotive sector; their visit to
the Iran Khodro Company provided useful insights into "the
excellence in automotive manufacturing in Iran,"he added. He
also said that Indian companies are increasingly interested in
cement, juices, bitumen, and fertilizer. He noted that the new
port cooperation MOU illustrates the promising prospects in
cooperation in transport and shipping. In Kalantri's opinion,
however, trade mechanisms between Iran and India must be
formalized in order for trade between the two countries to
fulfill its potential.



MUMBAI AND IRANIAN BUSINESSES FIND WAYS AROUND TRADE OBSTACLES

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7. (C) While most large companies and conglomerates deny
investing or importing oil and other petroleum products from
Iran, other import and export companies in both India and Iran
have found financing mechanisms to work around sanctioning
polices on financial transactions, including servicing
transactions through Dubai, the Asian Clearing Union, and South
Korean banks that absorb the risk of Iranian letters of credit.




8. (C) LETTERS OF CREDIT: According to Shaikh and other
businessmen who returned from a recent trip to Iran (Ref A) the
inability to secure a letter of credit (LoC) from Iranian
companies and their banks is a major obstacle faced by Indian
traders. In 2007, the State Bank of India (SBI) announced that

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it would no longer negotiate LoCs opened by Iranian banks. The
most common practice, according to anecdotal information from
ConGenOff business contacts, is to work with Iranian companies
who process all transactions through banks and companies in
Dubai; however, this cannot be done in U.S. dollars. In 2007,
Indian exporters, such as exporters of teas, were able to
approach the Export Credit Guarantee Corporation (ECGC) of
India, which provided insurance coverage to exports on credit
terms in order to continue its mission of promoting Indian
exports. However, this practice ended in 2008 due to pressure
from SBI.




9. (C) SOUTH KOREAN BANKS: Shaikh told ConGenOff that South
Korean banks (no specific names given) are now supporting a new
mechanism for financing transactions with Iran. According to
Shakih, since Indian banks will not honor LoCs from Iranian
banks for trade finance, some Iranian traders have devised an
alternative route in which South Korean banks act as third-party
financial intermediaries between Iranian banks and traders and
Indian banks. For instance with Indian exports to Iran, a South
Korean bank would issue a non-USD denominated guarantee based on
an Iranian-origin LoC, allowing an Indian bank to pay the Indian
supplier for the goods received even though the Iranian buyer
has not remitted funds. The South Korean bank then charges the
Iranian buyer 6-8 percent for the "loan," which is lower than
the current Iranian lending rate, which is 12 percent or 24
percent on the black market. South Korean banks, able to
guarantee these LoCs for 365 days, enable Iranian entities to
use that money to finance their projects instead of borrowing
money from Iranian banks at a higher interest rate. SBI will
accept these LoCs backed by the South Korean bank guarantee (as
long as it is not in USD). The South Korean banks profit after
the loan is paid back.




10. (SBU) ASIAN CLEARING UNION: Kalantri said in his report on
his trip to Iran that he addressed the constraints in banking
and financial transactions with his Iranian counterparts. He
said that a large part of the export payment realization from
Iran is done under the Asian Clearing Union (ACU). (NOTE: As
discussed in Ref B, the ACU was established 1975 with eight
members --Bangladesh, Bhutan, India, Iran, Myanmar, Nepal,
Pakistan, and Sri Lanka - with a mandate that members banks
carry floats of each other's currencies and manually settle
accounts every two months. END NOTE.) He revealed that during
his trip to Iran in 2008, Indian exporters complained of
"administrative bottlenecks" slowing down transactions between
Indian and Iranian businesses. He lamented that Indian
exporters especially were hit hard as they could not receive
payments in USD from Iranian importers. (NOTE: Kalantri is most
likely referring to the restriction by the U.S. Office of
Foreign Assets Control of all USD transactions, directly or
indirectly, involving Iranian banks and companies as well as the
settlement of third-country trade transactions. Indian
businessmen have complained on various on-line trade blogs and
message boards about this complication in financial
transactions. End NOTE)




11. (SBU) In order to resolve the problems that these exporters
were facing, the Reserve Bank of India (RBI) published a
circular in January 2009 announcing that the ACU participants
would have the option to settle their transaction either in ACU
dollars (equivalent to one U.S. Dollar) or ACU Euros (equivalent
to one euro),allowing Indian importers and exporters to legally
and effectively side-step the U.S. ban on making payments to
Iranian exporters and receive payments from Iranian importers.
This will also allow authorized banks in India to open and
maintain ACU Dollar and ACU Euro account with their
correspondent banks in other participating countries, like Iran.



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12. (C) Comment: Small and medium sized trade companies in
Mumbai are clearly eager to exploit the Iranian market, and
bilateral trade is small, but growing. Indian goods are
becoming more popular in Iran, as more and more Iranians are
traveling to India for work, study, and tourism. At the same
time, Indian demand, although reactive to the inflating costs of
Iranian goods, remains strong for certain imports to which they
have been accustomed. Thus, while the increasing desire to
trade with Iran is encouraging Indian business to find ways
around sanctions and other obstacles, it will be interesting to
see if Indian financial institutions continue to support the
exploitation of loopholes found in the guaranteeing of LoCs
another financing mechanism. End Comment.
TYLER