How could de-dollarization foster Iran – Russia alliance? Removing trade barriers

The increasing number of harsh economic sanctions against Russia and Iran immensely deepened the strategic partnership between the two states to tackle the consequences. As Western-imposed international sanctions hit the economic growth of both states badly, Moscow and Tehran intensified efforts to find new ways for trade, banking, and energy payments. In January 2022, Iranian President Ebrahim Raisi arrived in Moscow to discuss monetary and banking issues between Russia and Iran. The two sides agreed to remove trade barriers between one another to increase trade to $10 billion per year.

According to earlier provided data by the Iranian media, commercial exchange in both countries hit a new record in 2021, exceeding the equivalent of $4 billion. Russian exports to Iran account for over $3 billion, while Russian imports from Iran reached $967.3 million. As such, Tehran and Moscow apprehended that under new conditions, both states needed to switch to national currencies for bilateral trade and banking operations. Hence, during the meeting with Vladimir Putin, President Raisi discussed measures to challenge the dominance of the US dollar and continue trade between Russia and Iran in their respective national currencies. It is noteworthy that shortly after the military intervention in Ukraine, Russia became the most sanctioned country in the world, following Iran's suit in that sense.

Iran's chances to eliminate some economic sanctions are doomed to fail, as the nuclear talks with the Western countries did not reach clear conclusions. As a result, Tehran’s pivot to Moscow was inevitable. In fact, the cooperation in banking and monetary issues between the two emerged even before the war in Ukraine unfolded. On  July 2022, Ali Salehabadi, Governor of the Central Bank of Iran, said, after detailed negotiations with the Governor of Russia’s Central Bank, Alexander Novak, that "concrete steps will be taken, and we will soon see the implementation of reached agreements”.

The original de-dollarization plan was formulated by VTB and its CEO Andrey Kostin. The plan was meant to be a part of Russia's long-term strategy to insulate the Russian market against external pressure and contribute to developing the domestic financial system. Reportedly, the de-dollarization plan was envisaged to be incremental instead of abandoning the dollar immediately and entirely.

The policy of gradual de-dollarization amid the global security cataclysms was the only viable option for Tehran and Moscow amid their shrinking influence and stagnating influence. Even Iran's Supreme Leader Ayatollah Khamenei stressed the necessity of this policy, pointing out that "the US dollar should be gradually taken off global trade, and this can be done gradually”. Khamenei also called for long-term cooperation between Iran and Russia, telling Putin that the two countries needed to stay vigilant against "Western deception”.

On the same day, in a symbolic act, trading occurred between the Russian ruble and the Iranian rial on the Iran Currency Exchange. The first trade occurred on July 19 with a 3 million ruble ($48,000) exchange. Another serious challenge for both states in comprehensive cooperation in the banking field is their very limited access to the SWIFT network (Society for Worldwide Interbank Financial Telecommunication), which is a critically important factor. Iran found itself cut off from SWIFT after the Trump administration unilaterally withdrew the US from the Joint Comprehensive Plan of Action (JCPOA, more commonly known as the Iran nuclear deal) in May 2018, while Russian banks’ access to SWIFT was limited sharply since it occupied the eastern part of Ukraine in 2014.

As a result, Russia decided to develop a national interbank exchange system, the Financial Messaging System of the Bank of Russia (SPFS), after 2014 and attempted to expand the SPFS to the BRICS (loose arrangement of Brazil, Russia, India, China, and South Africa), the Eurasian Economic Union (EEU), the Shanghai Cooperation Organization and other important partners, though only partly successful.

Nevertheless, Iran joined Russia in developing an alternative banking system to integrate the well-known Russian Mir payment system and the Iranian Shetab banking system. Russian Mir system emerged as a product in the post-2014 period to overcome international economic sanctions. Simultaneously, Iran developed the Shetab banking system in 2002, intending to create a uniform backbone for the Iranian banking system to handle ATM, point-of-sale, and other card-based transactions.

Ironically, until now, Iran – Russia banking and monetary cooperation yielded positive results, both states' banks act more freely after being ruled out from the SWIFT system. The gradual de-dollarization of the local banking system and commercial transactions and replace it with the ruble and rial would further foster the ties between Moscow and Tehran and create a dangerous regional tandem.