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Asia giants join Iran diplomacy as sanctions hurt trade

A technician is seen at the uranium conversion facility in Isfahan
A technician is seen at the uranium conversion facility in Isfahan

By Michael Martina and Michael Hogan

BEIJING/HAMBURG (Reuters) - China said on Friday it would send a senior official to Tehran to discuss Iran's nuclear standoff with the West, and India indicated it would also weigh in, as Asia's two giants seek to head off new sanctions already playing havoc with trade.

New financial sanctions imposed by the United States and European Union are making it difficult for Iran to pay for staple food and other imports, causing hardship for its 74 million people with just weeks to go before an election.

Commodities traders revealed this week that Iran has resorted to barter trade - swapping gold bullion in overseas vaults or tankerloads of oil for food - to avoid payments problems in international banks over sanctions.

On the streets of Iran, prices for food in dollar terms have doubled or tripled in recent months.

In the latest evidence of trade disruption, metal traders said Iran's imports of steel for construction had collapsed because sanctions prevent buyers from obtaining the currency needed to purchase it.

The International Energy Agency, which monitors oil markets for developed countries, said on Friday EU oil sanctions and U.S. financial measures due to take effect over the course of the next several months were already hitting global trade flows.

In an analysis ominous for Tehran, the IEA also said there was enough oil supply worldwide to prevent a price shock if Iran is blockaded this year.

That makes it easier for Washington to impose harsh sanctions envisioned under a new law which requires President Barack Obama to assess the impact on energy markets before pressing ahead with its most draconian measures.

"The market in 2012 likely has sufficient supply-side flexibility" to adjust to any loss in Iranian volumes due to sanctions, its monthly report said. It cited softer demand growth, Saudi spare capacity and the resumption of supplies from Libya that were disrupted last year.

China's Foreign Ministry said on Friday Assistant Foreign Minister Ma Zhaoxu would head to Iran for talks on Sunday.

"We have consistently advocated dialogue as the only proper channel for resolving the Iran nuclear issue," ministry spokesman Liu Weimin told a regular news briefing. Ma will "have a further exchange of views with Iran over its nuclear program," he added.

China is one of six powers - along with Britain, France, Germany, Russia and the United States - negotiating with Iran over its nuclear program, which Western states say is aimed at building a weapon but Iran says is peaceful.

Those talks collapsed a year ago and show little sign of resuming. Iran refuses to negotiate over its uranium enrichment program and Western countries say there is no point in talking unless uranium enrichment is on the table.

China is also Iran's biggest trade partner, buying a fifth of Iran's oil exports last year.

If Iran is to endure sanctions without severe pain, it would need China to keep buying its oil and even increase its purchases to make up for lost sales to Europe. But China has been playing hardball with Iran, seeking steep discounts for oil, cutting its purchases this year by more than half and securing alternative supplies from Russia and Saudi Arabia.

Cuts in Chinese oil purchases make India the biggest buyer of Iranian oil this year. A payments system for trade between India and Iran was shut down last year under U.S. pressure. Under a new agreement, Iran is meant to accept 45 percent of the value of its oil in Indian rupees to buy Indian goods, but the system is not yet running while India decides how such transactions would be taxed. Indian traders have had difficulty receiving payment for rice and tea they send to Iran.

European Council President Herman Van Rompuy, visiting India, said the EU also wanted Delhi to help press Iran to give up its nuclear program to end sanctions.

"In order to achieve that result, you need more pressure on Iran, more sanctions on Iran," he said.

India's Prime Minister Manmohan Singh defended India's trade ties with Iran, and leant Delhi's backing to diplomacy.

"Iran is a close neighbor. It is an important source for our energy," he said. "There are problems with Iran's nuclear program. We sincerely believe that this issue can be and should be resolved by giving maximum scope to diplomacy."

HARDSHIP BEFORE VOTE

Iran is heavily dependent on imports to feed its people, buying 45 percent of its rice and most of its animal feed abroad. Trade problems caused by sanctions appear to be worsening inflation already high because of President Mahmoud Ahmadinejad's economic policies, which have replaced subsidies for basic goods with cash payments to families.

The result is severe hardship for many ordinary Iranians, with just three weeks to go before a parliamentary election that will pit Ahmadinejad's supporters against conservatives who oppose his economic reforms. Reformists - either barred or boycotting - are barely represented.

The election will be Iran's first since a presidential vote in 2009, when Ahamadinejad's disputed victory over reformist opponents triggered eight months of violent street protests. That uprising was put down by force, but since then the "Arab Spring" has shown the vulnerability of authoritarian governments in the region to public anger over economic hardship.

The latest disruptions in Iran's trade have been caused in part because agents in the United Arab Emirates were no longer permitted to act as middlemen and process payments for Iranian buyers of imported commodities.

Shipments of palm oil from Indonesia and Malaysia - which represent 90 percent of the global supply of the vegetable oil staple - have been halted. Grain ships have been diverted.

Iran is one of the world's biggest importers of billet, or semi-finished steel bars, used in construction. A steel trader at a Swiss metals trading house said: "Now you can feel the effects of the sanctions imposed by the U.S. and Europe... It is very difficult to do any business with Iran at the moment."

Boris Krasnojenov, an analyst with Moscow-based Renaissance Capital, said the collapse in trade with Iran was a major problem for Russian steel plants. It has depressed international prices, knocking nearly 10 percent off the price of Russian and Ukrainian steel over the past month.

There are signs that Iran is quickly finding new ways to circumvent sanctions, but these could mean paying over the odds for imports and selling exports at a discount. Barter is particularly inefficient.

One European grains trader told Reuters: "Iran is a rich country but has been caught by surprise by the sanctions and the decision by the United Arab Emirates not to allow the type of sanctions busting via Dubai which was commonplace in the past.

"The big trading houses are believed to have received crude oil and gold bullion as payment for past deals. The big boys have the ability and financial knowhow to quickly sell this on without suffering carry losses.

"No one really wants barter payments, but the Iranians appear to be getting their act together and are offering more financial payments in currencies apart from dollars or euros. Yen and Brazilian reals are being mentioned a lot."

Another trader said: "There is talk that banks in Bahrain are playing ball with Iran and helping out with payments. There is also talk that payments are being made via Venezuela."

(Additional reporting by Manoj Kumar in New Delhi, Silvia Antonioli and Claire Milhench in London, Alfred Kueppers in Moscow; writing by Peter Graff; editing by Janet McBride)

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