Western sanction-stricken Iran and Russia have taken a crucial step in interconnecting their interbank communication and transfer systems with the goal to improve trade and financial operations, as both Tehran and Moscow continue to struggle with the impositions.
Newly-appointed Central Bank of Iran (CBI) Governor Mohammadreza Farzin said, “The financial channel between Iran and the world is being restored.” Russia has not yet issued a statement on the financial interconnection.
Collaboration between SPFS and SEPAM
The CBI said the two nations, after years of effort, have successfully linked Iran’s SEPAM national financial messaging service with Russia’s Financial Messaging System of the Bank of Russia (SPFS). Mohsen Karimi, the Deputy Governor of Iran’s Central Bank, stated that around 700 Russian banks and 106 non-Russian banks from 13 countries will be linked to this system.
The purpose of SPFS is to connect Russia with other major powers like China and India through a system similar to SWIFT (Society for Worldwide Interbank Financial Telecommunication). SWIFT is the worldwide financial messaging and transfer system. Russia began developing SPFS when it was threatened with exclusion from SWIFT for annexing Crimea in 2014.
Why the countries need their own financial networks?
In 2018, the US re-imposed sanctions on Iran in when Washington abandoned Tehran’s 2015 nuclear deal with world powers. Since then, the Islamic Republic has been cut off from the Belgium-based SWIFT financial messaging service, which serves as a crucial international banking gateway. The talks to revive the nuclear agreement remain impasse.
Iran claims that all of its dozens of banks can now communicate with Russian banks and the more than 100 banks from 13 other (largely Eurasian) nations that use SPFS. Some similar sanctions from the West against Russia was imposed as Moscow invaded Ukraine last year.
The announcement comes as relations between Tehran and Moscow have grown closer over the past year over the sanctions. Additionally, Iran has been criticized for allegedly supplying Russia with drones prior to the invasion of Ukraine in February 2022.
Strong efforts from both sides although materialisation remains key
Officials from Iran and Russia report that bilateral trade increased to almost $4 billion last year, marking a new milestone for the partnership of Iran and Russia. Last Monday, the Iranian authorities announced that in the first year of Ebrahim Raisi’s presidency, Russia invested $2.7 billion in the sanctioned Iranian economy.
Iran and Russia required a better banking link to strengthen their economic ties, and the necessary technical infrastructure appears to now exist. According to Hamidreza Azizi, a fellow at the German Institute for International and Security Affairs, Russia is now pushing for structured financial cooperation as much as Iran was interested prior to the Ukraine war and the sanctions imposed on Moscow.
He remarked, “In that sense, it seems that for the first time in the past decades, there is a strong will on both sides to enhance and institutionalize economic relations. “So, the political will is certainly there.” However, Azizi stated that, at least in the near future, the Russian system would not be a feasible alternative to SWIFT since it requires other large economies, such as China and India, to join or even lead.
“As both countries are still quite cautious with regard to their relationship with the West, this will take a long time, if at all, to materialize. It also depends, to a great extent, on the future of the global rivalry between Washington and Beijing,” he said.
Connecting Iran’s financial messaging system to Russia’s does not immediately improve banking ties between the two countries. Because the SPFS-connected banks must still decide if they wish to engage with Iranian customers and open correspondent accounts with Iranian banks.
Attempt to strengthen currencies: Will it be a ‘game- changer’?
Tehran and Moscow are also trying to make more trades in their own currencies so that the US dollar and the euro have less of an effect on their economies.
The Russian rouble was formally added to the basket of currencies provided in NIMA in July of 2022. NIMA is a state-run foreign exchange market for Iranian importers and exporters that was founded in 2018 and is regulated by the central bank.
Former CBI head Ali Salehabadi stated that the ruble-rial market was established with a transaction of 2 million rubles (about $28,300). He also urged Iranian exporters to Russia to sell their rubles on the market. NIMA now keeps a fixed rate that is artificially lower than the open market. This stops the Iranian currency from falling even more, which it has falling recently because of protests and ongoing tensions with the West.
According to Esfandyar Batmanghelidj, an economic think tank, making it feasible for banks to execute cross-border payments would not necessarily result in an increase in trade, since Russian and Iranian businesses still encounter obstacles. “There remains a lack of liquidity in the foreign exchange market for rubles and rials,” he said.
“The Russian and Iranian economies also lack basic compatibility. The two countries export and import the same goods, meaning that they are competitors in those few markets that remain open to engagement in sanctioned trade,” he added.
Batmanghelidj remarked that the news on the financial link is noteworthy because it signals that Russian and Iranian policymakers are striving to remove some technical impediments to increasing trade, but it is not a “game-changer” in and of itself. Furthermore, this strategy may assist Iran in evading the international sanctions framework, but in the long run, Tehran’s reliance on Russia may constrain its diplomatic flexibility. (Source: Al Jazeera)