Integrating the two countries’ banking subsystems can accelerate the de-dollarisation process and facilitate economic relations and tourism between Iran and Russia, which can be used as a pattern for the use of national currencies in the Eurasian Economic Union, Shanghai Cooperation Organisation (SCO) and BRICS, writes Valdai Club expert Vali Kaleji.
Banking and financial relations between Iran and Russia have developed significantly in recent years in a way which is unprecedented in the history of relations between the two countries. This happened due to the influence of several factors; the most influential of these are Western sanctions against the two countries, the SWIFT (Society for Worldwide Interbank Financial Telecommunication) embargo against them, the replacement of the dollar in bilateral trade relations with the ruble and rial, the increase in Iran's transit and trade via the North-South corridor, the upgrading of the Preferential Trade Agreement (PTA) between Iran and the Eurasian Economic Union (EAEU) to a Free Trade Agreement (FTA), and Iran's full membership in BRICS and the Shanghai Cooperation Organization (SCO).
In the latest development, Iran and Russia have linked their national payment systems. The linkage between Russia's Mir and Iran's Shetab payment systems was established in a ceremony in Tehran attended by Governor of the Central Bank of Iran (CBI) Mohammad-Reza Farzin and Iranian Ambassador to Moscow Kazem Jalali on November 11, 2024. The ceremony unveiled the first phase of the project, which enables Iranian citizens to use their bank cards to withdraw cash in rubles from Russian ATMs. In the second phase, Russian nationals will be able to withdraw cash in Iran. The final phase will allow Iranians to make purchases at Russian stores using point-of-sale devices with their bank cards. In this process, Iranian banks including Refah, Saderat, Pasargad, Sepe, Meli, Tejarat and Tourism are connected to Russia’s Mir system. Bank Saderat Iran (BSI) and Russia’s VTB Bank act as agents.
Addressing this ceremony, Central Bank of Iran Governor Mohammad-Reza Farzin mentioned the “integration of the two countries’ banking subsystems as a big step towards creating integrated economic cooperation in the region, completing the de-dollarisation process, and facilitating economic relations and tourism between Iran and Russia. By connecting the national payment networks of the two countries, the borders of electronic payments will be removed and a new chapter will begin in the economic and cultural cooperation of the two nations.”
Russia designed and created the Mir system in 2014, in addition to creating a financial system independent of SWIFT, as a way of overcoming any potential blocking of electronic payments from systems designed by Western countries, such as Visa or MasterCard. Iran, meanwhile, established the Shetab Banking System in 2002, with the intention of creating a uniform backbone for the country’s banks. Therefore, based on these two banking infrastructures, Tehran and Moscow decided to integrate the Mir Payment System and the Shetab Banking System. After several meetings dedicated to overcoming technical difficulties and complications, both sides succeeded in connecting their national payment networks.
In addition, Iran and Russia have succeeded in synchronising “the banking messengers”. On January 29, 2023, the central banks of Iran and Russia signed a deal to connect their national interbank communication and transfer systems to help boost trade and ease two-way bank transactions. In fact, since one of the preconditions for creating a SWIFT-like system between Iran and Russia is the development of native interbank messenger systems, this issue has also been a key part of expert and technical negotiations between the two countries. In this regard, the banking messengers of Iran (SEPAM) and Russia (SPSF), the Russian equivalent of SWIFT, were connected in February 2023, and Sberbank and VTB Bank of Russia joined it.
On the other hand, VTB Bank, the second largest bank in Russia, opened an office in Tehran on May 17, 2023 which is an ‘Agent Bank’ between Iran and Russia. Indeed, the role of Mir Business Bank, the sole shareholder of which is Bank Melli (National Bank) Iran, has increased in Moscow, Kazan and Astrakhan. There is no doubt that such developments have played an important role in increasing Iran's trade volume with Russia and the Eurasian Economic Union from one to four billion dollars in recent years. As Deputy Prime Minister of the Russian Federation Alexander Novak said, “the volume of trade between Russia and Iran increased 48% in the first three months of 2024 compared to the same period last year. According to the results of the first quarter of 2024, Russia's exports to Iran have increased by 77% and the country's imports from Iran have increased by 13%.” Indeed, '”national currencies are being used in more than 96% of mutual payments between Russia and Iran”, the Kremlin’s press service said on ahead of the meeting between the presidents of the two countries on the sidelines of the BRICS Summit in Kazan on October 21, 2024.
It seems that this process in the banking cooperation between Iran and Russia can be used as a pattern for the use of national currencies in the Eurasian Economic Union, Shanghai Cooperation Organization (SCO) and BRICS. However, financial and banking cooperation between Iran and Russia continues to suffer from challenges and constraints, including the commitment of Iranian exporters to the “cancellation of export obligation”, which was adopted by the Iranian government and the central bank, the lack of stability in the exchange rate of the ruble and the rial against the US dollar, and the disparity in the volume of imports and exports between Iran and Russia, which has resulted in a mis-match in the sum of rials and rubles used in trade.
To overcome these challenges and constraints, both sides need to focus on continuous negotiations and reach rational and stable solutions. In this regard, to solve the problem of the imbalance between rials and rubles, part of Russian exporters’ ruble claims from Iran can be used for investment in Iran. By using this method, there is no need to transfer and exchange rials with rubles, and Russian companies can settle their financial claims via Foreign Direct Investment. Transit and transportation projects, Iran’s free economic zones such as Anzali Port, Amirabad Port and Chabahar, and the agricultural sector are among the suitable investment areas for Russian companies, which can provide the possibility of re-export for these companies to Russia and other countries.
