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 group in this port city, Mian Abrar Ahmed, said 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 completed, 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.
Iran and Pakistan have yet to address the logistical challenges that would be presented by any major increase in bilateral trade, particularly of bulk commodity movement from Pakistan, he said.
