Jun 30, 2013

Foreign Trade Policy of India - Chapter 2

I had given an introduction on Foreign Trade Policy (FTP) of India here. This post will concentrate on the second chapter of the foreign trade policy. The second chapter of FTP covers the general provisions regarding exports and imports. 

FTP says that all exports and imports are 'free' unless otherwise specified. Free to import doesn't imply no import duties. It just means that one can import by paying required duties and after completing the formalities. The exports and imports of merchandise is organized as per the International trade classification (harmonized system). DGFT on its website, maintains a link to the policy, based on the ITC HS code under the heading 'downloads'. One can easily look up to check if the good in question can be freely imported/exported here.

The other categories listed are 'restricted' and 'prohibited'. Restricted implies that one needs a license from concerned authorities to trade, and prohibited implies that the good can not be traded at all. This chapter also mentions the restrictions based on UN security council resolutions on countries such as Iran, North Korea etc. 

The final say on interpretation of the policy lies with the Director General of Foreign Trade. Chapter 2 also rationalizes the grounds for restriction on trade with the following statement: 
DGFT may, through a notification, adopt and enforce any measure necessary for: -
(a) Protection of public morals;
(b) Protection of human, animal or plant life or health;
(c) Protection of patents, trademarks and copyrights, and the prevention of deceptive practices;
(d) Prevention of use of prison labour;
(e) Protection of national treasures of artistic, historic or archaeological value;
(f) Conservation of exhaustible natural resources;
(g) Protection of trade of fissionable material or material from which they are derived;
(h) Prevention of traffic in arms, ammunition and implements of war.
The restricted goods need a license/authorization which is given by DGFT/concerned authorities. However, the license cannot be claimed as a right. It may be denied based on procedures enforced from time to time. 

To trade from India, one needs an Importer-Exporter Code (IEC). It is a ten digit numeric code and is mandatory before undertaking international trade. IEC is issued by DGFT offices across various cities in India. 

Import of second hand goods are restricted. Capital goods, even second hand, are freely importable. However, second hand air conditioners, computers, photocopies, Diesel generators etc(even if they are capital goods for business) are restricted. The purpose of this restriction is to prevent import of e-waste/polluters.

Imports as samples, gifts and passenger baggage is 'free' as long as the product is freely importable as per FTP. Chapter 2 also outlines that sale on high seas is permitted. It also allows imports on export basis and other minor details on import/export restrictions. 

Bonded warehouses, where goods can be stored before paying duty, are mandated under this chapter. Department of Revenue/CBEC has issued detailed guidelines on bonded warehouses under Customs Act, 1962 (Section 57 to 73).

Another provision of FTP under this chapter that I find interesting is the para 2.40 which mandates that the denomination of trade can be in Freely convertible currency (FCC) or in INR but the payment realization 'shall' be in FCC only. So the currency to be realized as trade proceeds cannot be INR unless otherwise specified. This provision will slowly be diluted in coming years. Currently there are some arrangements where ACU units (Asian Clearning Union) can be used. However, the current use of such provision is very limited in scope and magnitude. The exception to above is given in this para:
However, export proceeds against specific exports may also be realized in rupees, provided it is through a freely convertible Vostro account of a non resident bank situated in any country other than a member country of ACU or Nepal or Bhutan. Additionally, rupee payment through Vostro account must be against payment in free foreign currency by buyer in his non-resident bank account. Free foreign exchange remitted by buyer to his non-resident bank (after deducting the bank service charges) on account of this transaction would be taken as export realization under export promotion schemes of FTP.
This chapter also talks about Export promotion councils, DGCI&S for data collection and E-initiatives and Grievance redressal committee. Chapter 2, is thus the cornerstone of the FTP of India. 




Jun 29, 2013

Foreign Trade Policy of India

Foreign Trade Policy of India

An Introduction



Foreign Trade Policy (FTP) document is the key document that announces the policy intent regarding international trade. It is the apex document that prescribes the broad outlines for imports and exports of goods and services, to and from India. Foreign Trade Policy is generally a five yearly document, and an annual supplement is released every year. Foreign Trade Policy of India is accompanied with  handbook of procedures in two volumes, that supplement and elaborate the details. 

In India, Foreign Trade Policy preparation is managed chiefly by Directorate General of Foreign Trade (DGFT), under Ministry of Commerce. I shall 'briefly' review the content of FTP in this blog. FTP is divided into several chapters as outlined below:

Chapter 1: This chapter has three sub-sections and covers the legal framework under which Foreign Trade Policy of India is created. It also mentions some of the special schemes which had been added recently to promote exports. The last part of the chapter talks about Board of Trade, its constitution and terms of reference. 

Chapter 2: It covers the general provisions regarding exports and imports from India. The opening sentence declares:
"Exports and Imports shall be ‘Free’, except when regulated. Such regulation would be as per FTP and/or ITC (HS). ITC (HS) contains the item wise export and import policy regimes. The ITC (HS) is aligned with international Harmonized System goods nomenclature maintained by World Customs Organization (http://www.wcoomd.org). Schedule 1 of ITC (HS) gives the Import Policy Regime and Schedule 2 of ITC (HS) gives the Export Policy Regime."
The details of product restrictions, if any, are available at the website of DGFT. Apart from products being 'free' and 'restricted' there is a third category of 'prohibited' products. Such products cannot be traded across borders in India (e.g. endangered wildlife). You can read the details of Chapter 2 here.

Chapter 3: This chapter covers the promotional measures, commonly known as incentive schemes, to promote exports from India. The details are covered in two posts, here and here.

Chapter 4: Duty exemption and remission schemes are covered in this chapter. The schemes are meant to import raw materials duty free for the export products. This is to avoid taxing those inputs that go out with the export products.

Chapter 5: Export promotion capital goods (EPCG) scheme is covered in this chapter. This scheme is meant to promote exports through helping the firms to import capital goods duty free to produce export goods.

Chapter 6: This chapter covers provisions for settings up of units that export their entire produce of goods or services under various schemes such as Export Oriented Units (EOUs), Software Technology Parks (STPs), Bio-technology parks (BTPs) etc.

Chapter 7: This chapter pertains to Special Economic Zones which are now governed by a special act called SEZ Act 2005, and rules.

Chapter 8: Deemed exports are covered in this chapter. 'Deemed' exports cover those exports that do not actually constitute direct exports, but go to someone who exports it as part of their products. The technical definition reads thus:
"Deemed Exports” refer to those transactions in which goods supplied do not leave country, and payment for such supplies is received either in Indian rupees or in free foreign exchange. Supply of goods as mentioned in paragraphs below shall be regarded as “Deemed Exports” provided goods are manufactured in India. (The paragraph below is not part of this post)

I shall outline important chapters from the above list in separate posts in this blog in coming days. 

Jun 27, 2013

Optimum foreign currency reserves and India

Rupee crossed 60/USD yeterday. It splashed across newspapers. RBI, the central bank of India, gave up any efforts to intervene during the slide, giving up meekly. India has a forex reserves of around 290 Billion USD currently, which is around 15% of the GDP. RBI could have deployed the war chest but it chose not to, logically so. The size of the INR forex market is around 50 to 70 Billion USD per day and to influence it significantly, the player must enter with a quiver of around 4 to 5 Billion USD and if RBI decides to deploy its forex reserves to this effect, it might run out of reserves in around 2 months. And the speculators will have an exponential run sooner than later, as the reserves dwindle, hastening the process of currency crisis. A breach of psychological benchmark of Rs 60/USD is better than a currency crisis. 

A floating exchange regime need not have any forex reserves, theoretically. But a forex reserve is required nevertheless. The reserves can be used to influence exchange rate, can be used to contain volatility, or to insure against loss of liquidity/capital market access.  Indian currency, INR, is not yet fully convertible, and India maintains a forex reserve. India maintains the 10th biggest reserve in the world. RBI's stated motive to maintain such reserve is to contain volatility. It has no stated intentions of maintaining forex rates at any particular level. That explains the non interventionist approach of RBI. It's not that RBI is not bothered as you can see in this news item. It's just that RBI finds it impractical to intervene at this point of time. 

A question arises as to how much reserves is adequate. If RBI doesn't use the reserve in times of crisis like this, is it judicious to keep a reserve? If yes, what should be the size of such a reserve? The answer is not simple. The cost of keeping a huge reserve is enormous, in terms of giving up on the earning potential of the reserves thus maintained. A huge reserve gives a psychological advantage if the central bank decides to intervene in the markets, but at the cost of wasted opportunity to earn. Indian reserves are decent, but not enormous. The power of RBI to intervene in the forex market is very limited. 

The blogger has a strong opinion that the reserve size is a function of the sensitivity of the forex market to intervention. It must be a function of the size of the market, and the size of the intervention required to bring about a required change in forex rate. The latter, that is the size of the intervention required to bring about an intended change in forex rate, is a function of order flows (the micro-structure approach) at any given moment, and the existing liquidity at that instant, and nothing else. For example, if the size of liquidity of the market at the given instant is around 50 Billion USD, and the order flows in one particular direction changes from one billion USD to say, five billion USD, it might influence the market enormously, whereas a directional imbalance of a hundred million dollars is not enormous. However, if the liquidity of the market dries up and becomes small due to lack of trade, then even a directional change of a hundred million dollars can bring about a bigger change in exchange rate. This is when the reserves come in handy. In a situation when the liquidity is low and the smaller volumes play a significant role. How frequent is such a situation? This is the moot point. 

I wish there was a good mathematical model to predict an ideal forex reserves size. I am yet to find one. If you know of any such model, please point it out. 

Meanwhile, the rupee bears the brunt of weak fundamentals. It just reflects the inherent flaws in the macro indicators, mainly the gap in current account and high inflation that has persisted over the last few years. This high inflation is chiefly due to mindless spending by the Govt on welfare programs such as NREGA, and the blogger has no qualms calling the kettle black, when it is indeed black. The situation about current account is elaborated here by the blogger. 

And the optimum size of forex reserves, for a country like India, remains a question unsolved. 



Jun 17, 2013

India's foreign trade May 2013 - The gloom continues

The foreign trade data (merchandise) was released today. It paints a gloomy picture of trade. The exports declined:

Exports during May, 2013 were valued at US $ 24505.66 million (Rs. 134807.62 crore) which was 1.11 per cent lower in Dollar terms (0.13 per cent lower in Rupee terms) than the level of US $ 24779.72 million (Rs. 134983.82 crore) during May, 2012. Cumulative value of exports for the period April-May 2013 -14 was US $ 48670.03  million (Rs. 266203.05 crore) as against US $ 48568.66 million (Rs. 258239.33 crore) registering a growth of 0.21 per cent in Dollar terms and growth of 3.08 per cent in Rupee terms over the same period last year.

The imports increased:

Imports during May, 2013 were valued at US $ 44649.26 million (Rs.245619.14 crore) representing a growth of 6.99 per cent in Dollar terms and 8.04 per cent in Rupee terms  over the level of imports valued at US $ 41733.45 million ( Rs. 227336.72 crore) in May, 2012. Cumulative value of imports for the period April-May, 2013-14 was US $ 86600.99 million (Rs. 473734.59 crore) as against US $ 79540.94 million (Rs. 423225.26 crore) registering a growth of 8.88 per cent in Dollar terms and growth of 11.93 per cent in Rupee terms over the same period last year.

The rupee has depreciated over last year. That explains the difference in terms of trade in dollar and rupee terms. The rupee slide is due to the high current account deficit and bad numbers churned out by major macro indicators. The trade deficit increased by more than 7 billion USD over last year period of April-May.  7 additional Billion dollars of deficit in two months is significant.

Indian policy makers are absolutely clueless about how to turn this around. The foreign trade policy can hardly do anything about it. As pointed out by your blogger in this earlier post, the situation is turning bleaker, with the foreign capital inflows being stymied now. I wonder how India will afford such a huge current account deficit in times to come. Rupee is poised for a major slide. The blogger cannot rule out a level of Rs 62/dollar by year end if things continue this way. There is hardly much that RBI can do in terms of intervening in the rupee market. The forex market has grown to a magnitude of more than 70 Billion USD per day, seriously limiting the influence that our central bank can have on rupee valuation. There are merits of having a devalued rupee, but the inelastic imports (oil and gold) might lead to an imported inflation in India. The debate is out in the papers. The blogger will leave it at that.

It's time to reboot reforms. Period.


Jun 7, 2013

Rupee slide, CAD , current happenings and some unwanted advise

Rupee has depreciated above Rs 57/USD. The current account deficit (CAD) has gone above 5% of GDP during previous quarters. It had reached 6.7% for the Oct-Dec quarter last year. In simple terms, we are importing more and exporting less. The difference is being financed currently by  capital inflows into markets, direct investments into India and borrowings. The investments flows in recent quarters were helpful due to the quantitative easing (QE) at US and Japan. The excess global liquidity found its way into India too, helping our cause of financing the deficit. 

In coming months, the QE from the US will taper off, most likely by Dec this year. There has been indications from US Fed regarding this in the news. The expectation of this event itself has caused the USD to strengthen across the world. The effect has started playing on Rupee too. 

However, that's not the only factor. Global investors have noticed the gap in our financing. Our major imports, petroleum products, are inelastic to price, subsidies being a cause of it. Also, the penchant for Gold continues unabated, irrespective of minor tweaking of taxes on Gold. Gold has proved to be an effective hedge against inflation in recent years. Also, Gold and real estates are safe parking places for black money. So you can't blame the culture if it continues to be Gold standard.  Weddings continue to gorge gold and weddings won't stop because of CAD. And many analysts have ignored the consumer electronics which also add to our import bill. On the exports side, the global demand is still sluggish. US markets seemed to show improvement, but the story is still being debated. The emerging and new markets are being looked at, but they need time to develop. So overall, it doesn't seem that our exports will be able to finance our imports for some time to come. And with the capital flows tapering off, we won't be in a comfortable position.

Theoretically, what should happen is this. As CAD increases, Rupee should depreciate, making our exports competitive. Also, as rupee depreciates, imports would get costlier, thus killing demand for imported products. Over a period of time, the gap narrows and we come back to normal with no deficit (or move to surplus). That's theory. In reality, a sudden depreciation doesn't make our exports competitive. There's a lag built into it. I had blogged about that here. Also, exports are a function of global demand, which doesn't seem to improve. On the other hand, imports might be shielded by subsidies, or might be inelastic by nature/culture, and might not react to rupee depreciation. People in the field would talk about J curve and pass through effects too. Govt, in it's dim-wisdom and electoral compulsions, will keep spending more, given that it's an election year, further disturbing the economy and RBI's efforts to control inflation. And so on. To cut it short, natural economics might not work to restore balance and the situation might deteriorate from bad to worse very fast. Or is that the natural economics? 

Meanwhile, I saw the jokers from Export Promotion Councils predicting an export growth of 10% or more this year. Last year, they had predicted 20% growth, while the exports actually contracted by 4.4%. Audacity of hope, I must say.  Economists and your blogger are not that hopeful. Bleak times ahead.

PS: 
What would I do with my money and my above predictions? I will walk the talk. When Biwi comes from US, I would advise her to keep her money in Dollars and not convert it fast. I would check if I can park my money in some mutual funds that invest judiciously in US markets. Also, buy Gold (ETFs/Physical/Funds), against national interest, for my daughter's marriage  in future (she's 4 right now). I will stay away from Indian equities, as they might fall as a reaction to FII outflows. I will also stay away from any fixed deposit schemes that give me a return of less than 12% (I assume an inflation of 9% and hope to grow my money by 'around' 3%). I will also wait for the real estate to cool down before I buy any site/flat. And I will keenly follow one Mr. Murthy of Infosys fame (and first name not Phaneesh), to see when he exits, so that I go long when market over-reacts and make a killing when it corrects! I missed going short this time when market over-reacted and jumped high at his entry. It's already back to normal now. 

Jun 4, 2013

Bitcoins, SDRs and BitSDR

The idea of Bitcoins is more than 4 years old. The idea of special drawing rights (SDRs) by IMF is more than 44 years old. Both are attempts at creating alternative currencies for different purposes. 

SDR was created to help international trade tide away the exchange difficulties. SDR is not actually a currency, but a claim on currency, or a basked of currencies. Being internationally acceptable and with the ability to act as a medium of exchange, it has the potential to work as international reserve currency for trade. SDRs draw the legitimacy from the backing of IMF. How much backing the IMF has, especially when it comes to bringing SDRs to the center-stage of international trade, is moot.  Probably the idea needs some development, and, the backing of USD supporters. 

Bitcoin is virtual currency based on open source cryptographic protocol. It was introduced during Jan 2009. It is a peer to peer electronic cash system, and depends only on mathematical crypto-algorithms for its creation. There is a cap on maximum number of Bitcoins that will ever be generated at 21 million (by year 2040). This limiting cap might be a bad move, as Krugman helpfully points out. You can read more about how Bitcoin system works, here and here. Krugman has critiqued the idea here and here. Nevertheless, Bitcoins have done reasonably well for themselves and have achieved fair amount of acceptance in online transactions and black markets. Bitcoins have also undergone value fluctuations, crashes/recoveries, inflation etc, like any central bank backed paper currency. It is currently trading at around 120 dollars/Bitcoin. However, Bitcoins are not backed by any central bank or international authority. It is 'mined' virtually. Also, wider acceptance of Bitcoins in the real world is in question. Money is what people 'accept' as money. It might be gold, feathers, paper or Bitcoins. Bitcoins need time for acceptance.

Recent years have seen a lot of debate about Dollar being the prime global reserve currency. Also, competitive devaluation of currencies is being discussed after Abenomics of Japan, and the QE by the US's Fed. There are also nations who are not comfortable with US Dollar's pre-eminent position as reserve currency for international trade, e.g. Iran or Russia. Then there are currencies such as Euro, Yen, Renminbi, Pound and others. We do have multiple international currencies today but compared to USD, the share of others is low. About two thirds of world reserves are in USD, followed by around 20% in Euros and the rest is shared by all others. That means, the domestic problems of US is transmitted to the world through the reserve currency mechanism and there is hardly much that can be done as long as USD enjoys this position.

Here is what I propose. We can think of combining SDRs and Bitcoins. SDR as a concept is good. It has legal backing of IMF. And Bitcoin, as a technology, is great. A combination of Bitcoin and SDRs can create a good online currency that is tradable, liquid, and can be a good medium of exchange. The BitSDRs can be traded on regular exchanges and the base of BitSDRs can be determined by the IMF, based on the requirements of the international trade. A mechanism like SWIFT can be used for transactions between banks. That would de-link international reserve currency from getting affected by the domestic  compulsions of one nation. Of course, the size of big economies like US will continue playing an important role on the BitSDRs too, but that would be determined purely by the terms of trade and not domestic problems. And so on. You got the drift. 

Um...am I missing something? If it's this easy, there must be something wrong with the idea. Point it to me please.

Rejoinder,  Dec 2013: Bitcoins have gained in value meanwhile. Countries are looking at it seriously, but none of them have banned them outright. Bangalore is the leading city in India in terms of Bitcoin transactions. There is a global bitcoins conference being organized in Bangalore on Dec 14 and Dec15, 2013. 







Jun 2, 2013

EU Timber Regulation - Trade barrier that we didn't fight?

Illegal timber logging is a problem. It is identified as a problem in all civilized countries. Most of them have domestic laws to deal with the issue of timber logging. E.g. India has extensive forest laws to stop illegal timber logging. It is argued that corruption and fraud is rampant in timber trade and the extent of illegal logging might vary from 25% to 50% of all timber logged (anecdotal evidence from Wikipedia). The same illegal timber enters international trade too, and efforts are on to stop such activities. Good intentions. 

European Union has come up with a regulation sometime ago called the EU Timber Regulation(EUTR) applicable from 3rd March 2013. The stated obligations run thus:
The regulation counters the trade in illegally harvested timber and timber products through three key obligations: 

1) It prohibits the placing on the EU market of illegally harvested timber and products derived from such timber;

2) It requires EU traders who place timber products on the EU market for the first time to exercise ‘due diligence’. 

Once on the market, the timber and timber products may be sold on and/or transformed before they reach the final consumer. To allow for the traceability of timber products economic operators in this part of the supply chain (referred to as traders in the regulation) have an obligation to

3) keep records of their suppliers and customers.
I have seen the requirement of traceability of drug suppliers being applied rigorously in the case of pharma products. It is understandable due to human lives involved directly. Each bottle/strip of drug can not only be traced back to the manufacturer, but also to the lot/batch that the drug belonged to, and to the date of production.

Applying such requirements to timber products is moot. There will be advocates of global warming and such, who would go great lengths in defense. This blog doesn't differ on the principle of bad effect of de-forestation. The larger question raised here is, why is EU getting into extra-terrestrial legislation? Does it believe that their piece of legislation will prevail over domestic laws and stop illegal logging? What is the reason to believe so? 

What appears here is simple. The countries exporting timber and timber derived products, will now have an additional cost. The cost of compliance in terms of certification, process verification and documentation. This will add to the cost of business. The 'due diligence' can always be twisted beyond the information, risk assessment and risk mitigation goals as stated in the legislation originally. And this will further increase the cost of doing business. This, in simple terms, is a non-tariff trade barrier. In plain language, it says that if your timber products do not follow EU's certification and standards, EU will ban your products. And to meet EU's requirements and processes, you will incur additional cost, which will decrease your competitive advantage/margins. 

There was a similar piece of legislation from Australia last year, which was being contested by Indonesia and Canada. You can read more about it from Srikar's blog here. He raises a lot of pertinent questions from WTO point of view. The same questions apply here too. Also, Why should we let EU take higher moral responsibility of protecting the environment? Doesn't it mean that we don't trust our foresters and Customs/Excise officials?  And is is this legislation purely non-commercial in nature?

Now, there was a news report at SME times yesterday that said that India has come up with a certification process to comply with EUTR. It is called VRIKSH. The news report says:
"VRIKSH will suffice the due diligence requirements of international regulations set by foreign countries and authenticate the procurement source as legal based on evidential proofs. It plans to accelerate advocacy, raise awareness and build capacity and propagate the scheme amongst the overseas buyers," the Export Promotion Council for Handicrafts (EPCH) said in a press release.
The Export Promotion Council means good. It is doing the job of helping small exporters in its sector. It cannot be faulted for this line of approach. It also gets the legitimacy from this notification of DGFT. However, what disturbed me was this news report, in which the Govt representative talks about 'reinventing foreign trade mechanism', whatever it means, to meet the requirements. The press might have misquoted or whatever, but I gathered that India doesn't seem to have any ideas of contesting this piece of legislation.

That brings me back to Srikar's blog. The comments section goes on and on about the details and the provisions in WTO to counter such legislation, reiterating my belief that WTO is lawyers's paradise. Not coming from legal side, I realize that this piece of legislation will surely increase transaction costs and will bring down traditional advantage we enjoyed. Isn't that reason enough to pick up a fight, even if the details do not support us? Has someone done any research as to how much would be the benchmark increase in cost due to this legislation? Will it affect employment? Is there any study on the capability or readiness of our domestic timber based industry to face this new threat? Why are we so keen on implementing this piece of requirement that is thrown at us randomly, without contesting?  What are we planning to reinvent in foreign trade mechanism to counter this? 

I get only questions in my mind, with very few or no answers at all. 





Jun 1, 2013

Secondary economic/trade sanctions on Iran, some thoughts

Economic sanctions primarily consists of one nation preventing its citizens and corporations from doing business with the other targeted nation. Such basic economic sanctions are commonly called primary sanctions. However, if the first nation also tries to block foreigners or foreign organizations from dealing with the target nation, it becomes secondary sanctions. There are very few countries that can threaten with secondary sanctions today. In fact, only US can issue a credible threat with secondary sanctions, as things stand. And US has done it in the recent case with Iran when it imposed secondary sanctions on Iran's petroleum trade. 

Ideally, a non cooperating player in the international arena, can be brought to terms with  multilateral sanctions or actions. However, in case of Iran, US is not sufficiently happy with the UN imposed sanctions, mainly because the UN sanctions target only the nuclear program and not the overall economy in general. US believes that breaking the economy would automatically dismantle/slow down the nuclear program. Hence the need for primary and secondary sanctions. I won't get into the rights/wrongs/legality of the issue. US is the superpower and it can bulldoze resistance easily. Minions can split hair over the legality. People are evaluating if such secondary sanctions can be legally challenged at WTO. This blog won't go into that aspect. 
Given this, what are the options left to such a country like Iran? 

What the US did was simple. Firstly it told all the banks across the world that they would be banned from the US dollar payments system if they did business with Iran or banks from Iran. Then it also coerced the governing board of Brussels based SWIFT, or Society for Worldwide Interbank Financial Telecommunications, to exclude Iran's banks from participating. This meant that inter-bank money transfer in any globally convertible currency including Euro, Yen, GBP became difficult for Iran. US also targeted the insurance companies that cover the voyage risks, and the global shipping organizations sailing from Iran were not given  the insurance cover. That pulled out all the bigger shipping corporations away from Iran. And so on. The effect of this on Iran has been quite significant. One can read the details here. Briefly, the Iran's currency, Rial, plunged drastically. It's oil exports dropped. Currency reserves plunged. Iran had to put a ban on import of over 2000 consumer goods including items such as mobile phones, to preserve currency. Inflation shot up and affected the ordinary citizens adversely. 

Iran had few strong trading partners such as China, Japan, Russia, India, South Korea, Brazil etc. However, most of them towed the line of US. China and Russia mostly held out to Iran, with India coming on and off. Iran reached out to these countries to explore alternate financing mechanisms, including barter, gold exchange, accepting local currency etc. Countries even tried using faux front companies for inter-bank transactions, without naming the third beneficiary as Iran . SWIFT cannot determine if the third beneficiary is not declared in the inter-bank transactions, but it is against the rule-book. Also, SWIFT's governing board was not comfortable banning Iranian banks from the beginning, and probably, they too turned a blind eye. Alternate financing methods made use of such loopholes. Nevertheless, the effect has been profound. 

The point is, what if we are in the Iranian boots due to some cruel twist of fate in future. There is no alternate reserve currency today, with the depth of US Dollars. US seems to be misusing the pre-eminent position, and there is hardly much that the world can do about it, at this point. Debate is raging about IMF's SDRs as international currency, evolution of currency swap arrangements,. ideas such as BRIC bank and so on. But there is an urgent need to look at what can be done to make the economy risk-averse to such economic sanctions. India had faced sanctions just 15 years ago. And we can see a major oil exporter friend of India in trouble today. It's time we have some more ideas on this.