Nepali banks, fearful of secondary sanctions, are no longer issuing export certificates known as CADS (Cash Against Documents), complicating tea sales to Russia. Trump administration threatens to go “all in” on sanctions.

Hear the Headlines

Nepal Placed on Financial Grey List

US Treasury Secretary Scott Bessent threatened to go “all in” on sanctions on Russia this week to obtain a cease-fire in the Ukraine war.

In recent months, U.S. regulators enforcing sanctions have warned banks worldwide that facilitating transactions could result in potential measures, including asset freezes and exclusion from the U.S. financial system.

On Thursday, the US also said it would ramp up sanctions on Iran: “Making Iran broke again will mark the beginning of our updated sanctions policy,” according to a report by Bloomberg News.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it has broadened its sanctions framework to impose secondary sanctions on foreign financial institutions (FFIs) that conduct or facilitate significant transactions involving technology, defense, construction, aerospace, or manufacturing goods or services that support Russia’s military industrial base.

Workarounds have been in place since the invasion of Ukraine, but Nepal is more vulnerable than tea suppliers Kenya, Sri Lanka, and India, which has established a rubles-for-rupees trade agreement administered by international banks that continue to enable transactions (primarily for oil and natural gas).

Nepal’s February placement on the Financial Action Task Force (FATF) grey list will likely further hamper trade, regardless of destination.

The Economic Times reports the listing has “brought to fore the fact that Nepal has emerged as a haven in South Asia for money laundering owing to the absence of economic stability, lack of comprehensive and long-term vision and guidelines, weak interrogative system, lack of well-trained bureaucracy, and an open border and high levels of informal transactions with India, said people familiar with the matter.”

Nepal planter Anshu Giri who manages Samsher Tea, writes: “Banks are afraid of secondary sanctions. But the bigger problem is Nepal’s idiotic and archaic forex control regulations. The government mandates a CAD “certificate”, 100% Advance payment proof, or LC documents to be presented during outbound customs clearance (for countries other than India). When the inward remittance is received, the funds are settled.”

According to the Ministry of Agriculture statistics, Nepal produces 26,379 tonnes of tea annually on over 20,237 hectares, of which 18,902 metric tons is CTC tea.

Nepal annually shipped around $1.85 million worth of tea to Russia before COVID-19. That total began to slip with the imposition of sanctions following Ukraine’s invasion, mainly due to constraints on the Russian economy. Exports by value have since declined to less than $1 million a year.

Russia has not lost its taste for Nepali tea. During the first five months of the current fiscal year, Nepal exported 108 metric tons to Russia, valued at Rs 58.39 million (about $420,000 in US dollars).

Pre-payment or government-backed guarantees for CAD transactions could provide temporary relief to growers.

John Snell, principal at NMTeaB consultancy, writes that Kenya and Sri Lanka use barter as an option. “Barter trade works outside the norms of financial exclusions and is comfortable for Russia and India, so Nepal should be too!”

Sri Lanka exporters currently deal with Russia using documents sent directly to the importer, who then pays on the agreed-upon date or dates. Open delivery terms avoid the need to obtain CADs from banks. Russia imports around 25,000 metric tons of mainly orthodox tea annually, valued at $122 million in 2023.

The notification from Giri’s Kathmandu bank reads, “Due to the internal policy of this bank, the bank is not able to accept any import/export transactions related to Russia.”

Giri said the threat of secondary sanctions on banks will not prevent him from trading with Russia – prepaying is an option, but credit is preferred.

“The industry runs on credit,” writes Giri.

Other Workarounds

Commodities supply chain expert Sam Lambert at ZenGate Global suggests using stablecoins (crypto payment rails), which have already seen considerable adoption in other markets (about USD 142 billion on-chain). He said stablecoins are easy to adopt (you only need a way to off-ramp into the local currency).

Collateral-backed assets are another option, writes Lambert. “You could tokenize other batches of tea that are stored in warehouses. In other commodity markets, there are systems called Warehouse Receipts – these are typically accepted as a form of bank collateral, allowing producers to borrow money against it. You would need a reliable Oracle system and auditors to pull this off. But it has been done all over the world in non-tea markets.

Powered by RedCircle