After ship sank in its waters, Sri Lanka now feels Iran War in its tea trade
Sri Lanka’s tea industry is now feeling the impact of the Iran War, with exporters warning of losses of up to $10 to $15 million a week as fighting in the Middle East disrupts shipments and suspends a key tea-for-oil trade arrangement with Tehran.
This economic fallout comes days after the conflict reached Sri Lanka’s maritime region, when the Iranian Navy frigate IRIS Dena sank after a U.S. submarine strike about 40 nautical miles south of Galle, within Sri Lanka’s Exclusive Economic Zone.
The warship, carrying about 180 crew members, went down late Tuesday night following the strike. Sri Lankan naval and air force units launched rescue operations after receiving distress calls, recovering 87 bodies and rescuing 32 sailors, while many others were initially reported missing.
It marked the first reported U.S. strike on an enemy vessel in the Indian Ocean since World War II, and has since drawn Sri Lanka into the widening regional conflict even as Colombo insists it will maintain neutrality.
But the war’s economic impact is now emerging in an unexpected sector: tea.
Tea-for-oil
Sri Lanka’s long-standing tea-for-oil barter agreement with Iran has been suspended amid the conflict, halting a mechanism that allowed Colombo to repay oil debts through tea exports.
This deal was created in 2021 as a workaround to repay $251 million owed for Iranian oil imports, which Sri Lanka could not settle through normal banking channels due to sanctions.
Instead of cash payments, Sri Lanka exports Ceylon tea to Iran, with the value of the shipments deducted from the debt.
Under the arrangement, Iran purchases about 11 million kilograms of Sri Lankan tea annually.
According to the National Tea Planters Association, exporters are now unable to fulfil orders because of logistical disruptions, war-risk insurance costs and shipping uncertainty across Middle Eastern trade routes.
Sri Lanka’s Tea Exporters Association estimates the resulting revenue loss at about $10 to $15 million per week.
The group has also asked the government to intervene to secure about $50 million in payments still owed for tea shipments already delivered to Iran under the barter deal.
Why tea is a crucial industry in Sri Lanka
The disruption is significant for an industry that underpins Sri Lanka’s export economy.
Introduced in 1867, Ceylon tea remains the country’s largest agricultural export, generating about $1.45 billion in export earnings in 2022.
This sector provides direct and indirect employment to nearly one million people, including more than 300,000 plantation workers.
Tea plantations cover about 203,000 hectares, roughly 4% of Sri Lanka’s land area, producing around 340 million kilograms of tea each year.
Middle East is an important tea market
The Middle East is one of the tea industry’s most important markets.
Industry estimates show about 52% of Sri Lanka’s tea exports are shipped to the Middle East and North Africa, making the sector particularly vulnerable to disruptions linked to the Iran conflict.
Exporters say they still hold orders for shipments but are unable to move cargo because of security concerns and logistical barriers linked to the war.
For Sri Lanka — an island positioned along the shipping routes connecting the Middle East, Europe and Asia — the conflict is no longer a distant geopolitical crisis. Now, its most famous export is feeling the pinch, too.
This story is written and edited by the Global South World team, you can contact us here.
