Sanctions Could Destabilize Iran’s Tea and Coffee Markets

The newest international sanctions against Iran that are set to take effect on 4 November could put an end to the stability of the domestic tea market and undermine the growing coffee consumption in the country.
By Vladislav Vorotnikov

With population of 80 million and an average per capita tea consumption of 1.5 kg, Iran is the world’s fifth biggest tea importer, estimations of the Ministry of Agricultural Jihad showed. The overall domestic demand is estimated at 110,000 metric tonnes (mt) of the total worth up to USD $600 million, of which less than 25,000 mt is covered by the national tea industry, according to estimations of the Iran Tea Organization, an industrial association that unites tea manufacturers and importers in Iran.

Mohammad Rouzbehan, head of the Iran Tea Organization (ITO) believes that the Iranian fiscal year that started 21 March 2016 and ended 20 March 2017 was probably the best one for the domestic tea industry in the past decade. The country produced 139,000 mt of fresh tea leaves worth IRN 2.34 trillion (USD $62 million), of which processing factories manufactured 31,200 mt of dried tea, according to a statement posted on the ITO’s website. This was the highest figure since 2009-10 season, when the original international sanctions imposed against Iran began taking their toll.

Preliminary forecasts say that this year the overall production of fresh tea leaves and dried tea would not exceed 120,000 mt and 25,000 mt, respectively, primarily due to the poor weather conditions in the main tea-growing provinces of the country during the first months of the year. Nevertheless, this is almost two times higher, as compared to the record lows in production achieved in 2012-13, when the economic situation in the country was especially tough.

The Iranian tea industry is regulated to a great extent by the government. Almost all fresh tea leaves are purchased by a special government agency at a guaranteed price. With ups and downs in production costs and the offered price, which changes every year, domestic tea producers have had hard times, but in 2016-17 and 2017-18 the industry also saw a record-breaking profitability, the research conducted by ITO showed.

Impact of the Original Sanctions

The original sanctions against Iran imposed by the United Nations Security Council in 2006 have brought turmoil to the domestic tea market, according to the ITO.

“This was not only about the general pressure on the domestic economy, but primarily about the restrictions on international banking transactions. The exchange rate of the national currency slumped, but that was not too important, because all banks in the republic were disconnected from the SWIFT system, so no payments for imported tea could be made,” explained Mohamed Arzani, a member of ITO. SWIFT – The Society for Worldwide Interbank Financial Telecommunication – is an international network that enables banks to send and receive information about transactions. Iran was disconnected from SWIFT when the original sanctions were introduced, and this resulted in the local banks being cut off from the global banking system. This means that no payments for the imported products could be made and no payment for exported products could be received.

“As the result, we experienced severe problems in the domestic tea market, and a strong upturn in the tea smuggling into the country,” Arzani said. “The price for some imported products, like tea, for several years was so high, that it was not affordable for the middle class.” The reinstated sanctions are due to come into effect in a few months and although the production performance in the industry is different from 2016, the impact on the market is still expected to be strong.

In a statement released in early August, the Iran Customs Administration announced that the export of tea as well as some paper, dairy products and tissue were banned in packages weighing more than 500g. The statement said that the restrictions were imposed “until further notice” and the ultimate goal of that measure was “of balancing the domestic market.”

Iran exports only small batches of tea to neighbouring countries as well as to Russia. The overall supplies reach only 10 mt per month, but even these volumes could be crucial, when the domestic market is on the verge of an acute shortage. The export restrictions were maintained for slightly longer than a month, as in early September Mostafa Salari, governor of the Gilan province, announced that tea companies managed to urge the national tea industry to withdraw those limitations.

Despite this, the threat that the new sanctions will push the country to a food crisis similar to the one that took place in 2012, when the strong rise in prices for some products like poultry sparked hungry riots in Tehran and several other major cities, is still quite real. Noting this, some government officials say that the country must become self-sufficient with tea.

“Iran has 50 million ha [hectares] of agricultural land, of which only 20 million ha is actually used. We have good climate conditions and great potential to increase production of the main agricultural products,” commented Mehdi Taphreshi, head of the food department agency of Iran. In theory, Iran could increase tea production by 20 percent per year during the coming five years, in order to eventually abandon tea import completely, Taphreshi forecast. This, however, would take huge state aid and private investments.

Importers Express Concerns

The sanctions against Iran could also affect tea production in India, Sri Lanka and Kenya – the biggest tea suppliers to the country. These three countries jointly export nearly 50,000 mt to 55,000 mt of tea to Iran per year, which constitutes 95 percent of legal tea imports in Iran. All importers confirmed they were concerned about the renewal of the international sanctions.

“We may not be able to export tea to that [Iranian] market because of the sanctions. Payments for tea sold to Iranian companies will be difficult as the dollar is the dominant currency of trade,” Alfred Busolo, director general for the Agriculture and Food Authority of Kenya told the local news outlet Daily Nation.

In the meantime, the Indian Tea Association was seeking to conclude a deal with the Iranian government “on a special exchange rate for tea” after 4 November, when the US sanctions would come into effect.

The “special exchange rate” when some products are purchased avoiding transactions in dollars under financial terms attractive for importers were offered by the Iranian government for some essential goods, like pharmaceuticals. It is not clear, however, whether the same approach could be used with regard to tea imports.

The Central Bank of Sri Lanka is holding a series of round-table discussions on selling Ceylon tea if Iran would be affected by further sanctions, the Central Bank said in a statement published on its website in August. At the same time, Sri Lanka offered to export tea to Iran in exchange to the USD $250 million debt for oil supplies owned to the country by the national Ceylon Petroleum Corporation. The proposal reportedly was rejected by Iran, but the same concerns – about how the trade could be continued after 4 November – are being voiced.

Coffeehouses Jeopardized

For several centuries in the past, coffee was more popular than tea in Iran. Those times have long gone, and now tea is the national drink in the Islamic Republic. Nevertheless, coffee imports to the country increased almost ten times during the past decade, from only $600,000 in 2006 to $8.5 million in 2017, official statistical data indicates.

Iran imports around 3,000 mt of coffee per year, primarily from the United Arab Emirates, Vietnam, India, Indonesia, Turkey and Italy. Whilst most citizens drink tea at home, coffee is primarily served in coffee shops that are rapidly emerging in all major cities of the country. There were 300 coffee shops in Tehran alone last year. Coffee shops enjoy growing popularity, especially among the youth to some extent because in the country there are no bars, as alcohol is strictly prohibited.

Over the past few months, coffee shops and coffee importers were expressing concerns that the new sanctions may put an end to what is called a “coffee boom” in Iran. In April 2018 for the first time in its history, Iran imported more than $1 million of coffee in one month as importers started purchasing coffee in advance. It remains to be seen how the coffee industry will be able to cope with the challenges that are about to arise after 4 November.

Vladislav Vorotnikov is a Moscow, Russia-based journalist specializing in the food industry of Russia, Ukraine and other countries in the post-Soviet space. He may be reached at: [email protected].

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