KARACHI, Pakistan — Iran and Pakistan are negotiating a barter deal in which Pakistan would supply up to 22 million tons of wheat in return for discounted electricity and petroleum products, Pakistani business leaders involved in the talks said.
The proposal is part of a broader trade package being pursued by the neighboring states as Iran scrambles to find new suppliers to replace trading partners scared away by U.S. sanctions that have made it increasingly difficult to trade with Tehran.
While Iran and Pakistan haven't been major trading partners historically, economic ties between the two nations are growing stronger — particularly with the construction of a pipeline to carry Iranian natural gas to energy-starved Pakistan that is scheduled to be completed by the end of 2014.
The Pakistani government has vowed to go ahead with the pipeline project — despite repeated warnings from Washington that it would violate U.S. sanctions — because its economy has been hamstrung by major shortages in electricity and gas supplies.
Pakistan's enhanced ties with Iran have irked U.S. officials and contributed to tensions between Washington and Islamabad, impeding U.S. efforts to enlist Pakistan's help in finding a peace deal in neighboring Afghanistan.
Iran is locked in a confrontation with the United States and Western powers over its nuclear program, which the West says is aimed at developing a nuclear weapon, while Iran insists it's for peaceful purposes. Since the imposition of harsher U.S. and European sanctions in recent months — aimed at choking off Iran's international oil sales — Iran has offered energy products to Pakistan on increasingly softer terms.
Having completed its section of the natural gas pipeline, Iran has offered Pakistan the $250 million it needs to finance its section. Tehran also has offered to increase oil exports to Pakistan while deferring payment — a favor Pakistan's major suppliers, Saudi Arabia and Kuwait, have declined to grant — and has proposed to pay for Pakistani food exports with discounted electricity and petroleum products.
The pipeline figures to increase the volume of bilateral trade sharply. Official trade in Pakistani rice and Iranian petrochemicals — the main products each supplies to the other — totaled $1.2 billion in the financial year ending in June 2011, although informal trade and cross-border smuggling are common.
The wheat deal was floated last month by the Iranian deputy minister for trade, Abbas Ghobadi, in talks at the Karachi chamber of commerce and industry, Pakistan's largest business association. The president of the association in this southern port city, Mian Abrar Ahmed, said that Iran planned to export wheat products, a sign that Tehran is trying to raise foreign currency.
The business leaders and a senior banker, who spoke on condition of anonymity because the deal wasn't finalized, said trades would initially be denominated in euros, because European Union sanctions have so far not prevented the European central bank from handling Iranian transactions.
Iranian state companies have for years paid for Pakistani exports through euro accounts in Pakistani banks.
They said that would buy the Iranian and Pakistani authorities time to finalize the terms of a currency swap proposed in July by Pakistani President Asif Ali Zardari.
This would entail granting licenses to Iranian banks to open branches in Pakistan, applications that are currently under evaluation by Pakistan's central bank. Major Pakistani banks already operate branches in Tehran.
Zardari is seeking to expand the arrangement to include Turkey, a major Iranian trading partner, as part of a push to build regional trading blocs within Asia.
Much of the envisioned expansion in Pakistani trade with Iran is likely to be conducted as barter, with prices based on dollar-denominated international commodity rates, the business leaders and banker said.
That's because Iran's political troubles would translate to discounted terms for their Pakistani trading partners. The arrangement would be viable for Iran because it plans to use imported Pakistani commodities as raw materials for its manufacturing sector to produce value-added goods, they said.
The Pakistani business leaders said smugglers would cash in on the opportunities generated by U.S. sanctions, whether legitimate businesses did or not.
"There is already considerable informal trade between the two countries, especially in cheap petroleum products, because of the shared land border," said Zulfikar Thaver, president of the union of small and medium enterprises. "The authorities on both sides privately condone it because it helps redress domestic imbalances in supply and demand."
Iran and Pakistan have yet to address the considerable logistical challenges that would be presented by any major increase in bilateral trade, particularly of bulk commodity movement from Pakistan, he said.
The proposed trade is too massive to be conducted by road, so Pakistani wheat exports would have to be carried by ship. But freight insurance has become more difficult to obtain because the private clubs of ship owners that tend to provide that insurance are beginning to shy away from Iran-bound cargoes, fearing the impact of further U.S. and European sanctions.
(Hussain is a McClatchy special correspondent.)
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