Tehran, Iran – “The financial channel between Iran and the world is being restored,” Iran’s new central bank governor Mohammadreza Farzin said last week when he announced that Iran and Russia had taken an important step towards linking their banking infrastructures despite Western sanctions.
Russia has yet to comment but, according to the Central Bank of Iran (CBI), after years of work, the two countries have managed to connect Iran’s national financial messaging service SEPAM to the financial messaging system. Russian Bank of Russia (SPFS).
SPFS is the Russian equivalent of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global messaging and financial transfer system, and its aim is to link it to other major powers like China and India. He started developing the SPFS when he was threatened with expulsion from SWIFT for annexing Crimea in 2014.
The entire Iranian banking system is cut from swift following waves of US sanctions that began in 2018 when then-President Donald Trump unilaterally withdrew from the 2015 nuclear deal between Iran and world powers. Talks to restore nuclear deal deadlock.
But now, Iran says, all of its several dozen financial institutions can connect with Russian banks, in addition to more than 100 banks from 13 other — mostly Eurasian — countries that have access to SPFS.
The announcement comes as Tehran and Moscow have closer and closer last year after Russia invaded Ukraine, which triggered more Western sanctions against Russia. Iran was also targeted for supplying Russia with drones, which it says were delivered before the invasion of Ukraine in February 2022.
Developing economic ties is central to the relationship, with two-way trade reaching more than $4 billion last year for the first time ever, according to Iranian and Russian officials.
Iran’s government said last week that Russia, with $2.7 billion, was by far the largest investor in Iran’s sanctioned economy in the first year since the August 2021 start of Iran’s presidency. Ebrahim Raisi.
“The political will is there”
To further expand their economic relations, Iran and Russia needed a stronger banking link and now the missing technical infrastructure seems to be in place for that.
Before the war in Ukraine and the sanctions it imposed on Moscow, Iran was more interested than Russia in structured banking cooperation, but now it seems that Russia is also pushing for this, according to Hamidreza Azizi, member from the German Institute for International and Security Affairs. .
“In this sense, it seems that for the first time in the last decades, there is a strong will on both sides to improve and institutionalize economic relations,” he told Al Jazeera. “So the political will is definitely there.”
However, Azizi said, at least in the short term, the Russian system will not become a viable alternative to SWIFT as it needs other major economies like China and India to join or even take the lead.
“As the two countries are still quite cautious regarding their relations with the West, it will take a long time, if at all, to materialize. It also depends, to a large extent, on the future of the global rivalry between Washington and Beijing,” he said.
For Iran, simply linking its financial messaging system to that of Russia does not automatically strengthen banking relationships because banks connected to the SPFS still have to decide whether they want to work with Iranian customers and establish correspondent accounts. with Iranian banks.
“It’s as if a person is in the telephone network and can connect to anyone, but you can only tell that there is communication when it actually happens,” said Mohsen Karimi, assistant to the CBI’s international affairs, to the state-linked Tasnim agency last week.
Azizi told Al Jazeera he doubts non-Russian banks connected to the SPFS take the increased risk of having financial ties to Iran.
“I even doubt that all Russian banks are equally interested in doing this, because some of them still have interests in Europe and elsewhere that could be threatened if they work with Tehran,” he said.
“Lack of cash”
Tehran and Moscow are also working to strengthen the use of their national currencies in trade in an attempt to gradually weaken the impact of the US dollar and euro on their economies.
In July last year, the Russian ruble was officially added to the basket of currencies offered by NIMA, a state-run foreign exchange market for Iranian importers and exporters launched in 2018 and supervised by the central bank.
Ali Salehabadi, then head of the CBI, said the ruble-rial market was launched with a deal worth 2 million rubles (about $28,300), also encouraging Iranian exporters to Russia to offer their rubles on the market.
NIMA now maintains a fixed rate, artificially lower than the free market rate, in an effort to prevent further depreciation of struggling Iranian currency which recently experienced new all-time lows amid ongoing protests and tensions with the West.
Officials did not disclose any data on the volume of rial-ruble transactions in NIMA, nor on the exact share of their overall bilateral trade that is currently in national currencies.
Allowing banks to process cross-border payments does not mean trade will automatically increase as Russian and Iranian merchants continue to face challenges, according to Esfandyar Batmanghelidj, CEO of the Exchange & Bazaar Foundation, an economic think tank.
“There remains a lack of liquidity in the foreign exchange market for rubles and rials,” he told Al Jazeera.
“The Russian and Iranian economies also lack fundamental compatibility. Both countries export and import the same goods, meaning they are competitors in the few markets that remain open to engaging in sanctioned trade.
In that vein, Batmanghelidj said the announcement on the banking link is noteworthy because it signals that Russian and Iranian policymakers are working to overcome some of the technical hurdles to increased trade, but it does not change. gives it in itself.