Russia And Iran Experiment With Stripping Dollars From Their Bilateral Trade

Russia and Iran have begun to take some small – but potentially significant – steps towards removing the U.S. dollar from their bilateral trade, with the launch of a settlement system using their own currencies.

The Iran Currency Exchange (ICE) listed the ruble-rial trading pair in July, following a trip to Moscow by the Iranian central bank governor Ali Salehabadi earlier in the month.

The new arrangement means the two countries can now settle trading debts in each other’s currencies. The first trade took place on July 19, with a RUB3 million ($48,000) exchange. That also happened to be the day that Russia’s President Vladimir Putin arrived in Iran for talks with President Ebrahim Raisi and Supreme Leader Ali Khamenei.

Iranian media have reported that the new system could reduce the demand for dollars by $3 billion a year. Bilateral trade between Iran and Russia was worth $4 billion in 2021 but, finding common cause in their pariah status in the west, the two countries say they are hoping to ramp up bilateral trade to $8 billion in the short-term.

The new trading arrangement allows them to avoid the use of dollars and, by doing so, also sidestep the impact of some international sanctions. Both countries are the subject of wide-ranging trade embargoes by the U.S. and others – in Russia’s case because of its invasion of Ukraine in February; in Iran’s case because of its nuclear programme and other issues.

Iranian officials say they hope to expand the new bilateral settlement system to include the currencies of other key trading partners, including the Turkish lira, the Indian rupee and the United Arab Emirates dirham.

“We will offer other currencies in future to have a diversified basket and to reduce the influence of currencies like the dollar,” Salehabadi said on July 21.

If that happens, the effect will be to create a network of agreements enabling Iran to carry out trade without having to resort to the dollar or the euro. However, those involved on the other side of the deal may still be wary of the risk of getting caught up in secondary sanctions.

Swift action

Iran’s deputy foreign minister for economic diplomacy Mehdi Safari has also floated the idea of developing a new interbank messaging system between Iran and Russia. This could act as an alternative to Swift, the main international system now in place, which operates from its headquarters in Belgium.

Numerous Russian and Iranian banks have found themselves frozen out of the Swift system as part of the sanctions imposed on both countries.

Russia already has its own bank messaging system, SPFS (Sistema Peredachi Finansovykh Soobscheniy), which was set up following the 2014 invasion of Crimea. The Financial Times reported in March that this is increasingly used by banks for payments within the Eurasian Economic Union – a group which includes Russia’s neighbors Armenia, Belarus, Kazakhstan and Kyrgyzstan. Iran has discussed joining this system too.

More recently, in June Russia’s Rostec said it had developed a blockchain platform called CELLS, which could act as a substitute for Swift.

Speaking to the media in late July, Iran’s central bank governor Safari said, “Two countries that want to de-dollarize their transactions must have a special system similar to Swift… We have practically reached a very good agreement.”

In pursuing these initiatives, Russia and Iran are following the lead of other countries that have sought to reduce their reliance on western networks.

China has developed its own interbank settlement system called CIPS which has been in operation since 2015. In April, Russia’s finance minister Anton Siluanov called for the payments systems of the BRICS countries (Brazil, Russia, India, China and South Africa) to be more closely integrated.

However, such alternatives have some important limitations. In particular, they can be slower, more expensive and more prone to error.