Russia and Iran Connect Financial Payment Systems

Posted by Written by Paul Goncharoff

Move is the first bilateral step for what will become a growing trend of bypassing the US-controlled SWIFT banking network

By Paul Goncharoff

Officials of the Central Banks of Russia and Iran signed an agreement formally connecting their interbank transfer systems on Sunday (January 29). The agreement calls for the 52 Iranian bank branches that currently use Iran’s local interbank telecom system, known as SEPAM, to connect with the 106 banks using Russia’s System for Transfer of Financial Messages or SPFS.

The Shahr Bank of Iran and Russia’s VTB Bank will be heading up the initial pilot program and the other lenders will come on board once the pilot works through any bugs which might arise.

The advantages referred to at the signing are that these two interbank systems cannot be sanctioned, nor are their infrastructures in any way controlled by western governmental interests. Once fully implemented, it should pave the way for all Russian banks to interact with their Iranian counterparts. It is also likely in time to dilute the attractiveness of the global SWIFT payment network, where transactions are managed by fee-charging US corresponding banks, and whose mechanisms can be cut off at the behest of the United States or Europe. SWIFT is unlikely to die, but the Russia-Iran solution will mean more bilateral mechanisms such as theirs will become more common – although it is possible the US will try and impose sanctions on banks that do not exclusively use the SWIFT network. Yet if that was tried, SWIFT would implode and the US reputation for financial fair play be irredeemably damaged.

SPFS is the Russian Central Bank’s own development, and is equivalent to the SWIFT financial transfer system. It has been in existence since 2014 when the United States government first threatened to disconnect Russia from the SWIFT system, and today has grown to be widely used.

SEPAM is the Iranian development, and today acts as a pathway through which interbank transactions are conducted electronically.

Cooperation between the two countries has grown dynamically, especially noticeable since 2021 with increasing sanctions by the United States and European Union on both Moscow and Tehran, albeit for different reasons. Several bilateral intergovernmental and other agreements will be served by this payments system as expanded economic cooperation includes barter deals for Iranian turbines, spare parts, and aircraft equipment, through to contracts for the joint supply and construction of energy pipelines. Post-pilot, which is anticipated to be in the second half of 2023, the system will allow for the growth of trade in a wide array of goods and services, from automobiles and agricultural products to textiles and beyond.

The Iran Currency Exchange (ICE) first listed the ruble-rial trading pair in July 2022. This has allowed Russia and Iran to settle trade payments in each other’s currencies. The first such trade was in July 2022 with a test Rubles 3 million / Rial exchange.

Iran states that this new system could reduce the demand for dollars by US$3 billion a year and grow larger over time. In 2021 Iran-Russia trade was almost US$4 billion. The two countries say they are hoping to increase annual bilateral trade to US$8 billion by 2030.

The effect should also be beneficial in supporting mutual tourism and domestic payment networks as the integration of Iranian and Russian bank card networks; under development since 2017 is expected to be completed soon.

Last summer, Iran prepared the infrastructure to join Russia’s Mir system. But after international sanctions were announced on Russia for invading Ukraine and subsequently cutting off Russian bank access to SWIFT, the two sides decided to focus on creating a rival to SWIFT for cross-border payments. The two countries are also working on a gold-backed cryptocurrency token.

Trade with Iran is a factor for Russia in and of itself. It is also viewed as an important logistical bridge between Russia, other Middle Eastern countries, India, China and Southeast Asia, due to Iran’s geographical placement along the INSTC, which connects Europe with South Asia, East Africa and the Middle East and is a cheaper and faster alternative to the existing Suez canal routes.

Russia has also become Iran’s largest foreign investor, according to Ali Fekri, Iran’s Deputy Finance Minister. Speaking on Sunday (January 29) Fekri said that Russia “had brought some US$2.7 billion worth of investment to two petroleum projects in Iran’s Western province of Ilam in the past 15 months.” The figure accounts for some 45% of the total foreign investment attracted by Tehran over the October 2021 – January 2023 period.

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