0731 GMT November 15, 2018
The burden of hard financial sanctions, when transactions in dollars have become impossible due to disconnection from the SWIFT payment system, is still well remembered as it caused a massive damage to Iran's economy.
If taking into account that oil revenues constitute the backbone of the Iranian economy, and that oil prices are tightly linked with the dollar, it becomes clear how volumes of the country’s oil exports literally collapsed, and how Iran lost its strong position in the world’s oil market. So far, the country’s economy still continues to recover from the effect caused by sanctions.
The threat of new sanctions is still high enough. Therefore, Iran’s leadership is looking for alternate ways that would allow the country’s financial system to avoid, albeit not completely, dependence on the dollar.
Iran sees a solution to withstand possible future challenges in concluding bilateral currency swap agreements with some of its trade partners.
In the past, Iran had this kind of experience in its trade with India, when it took payment for oil in Indian rupees.
In mid-October, Iran and Turkey announced that the final agreement for a currency swap to facilitate trade and to boost direct investments had been signed.
According to the agreement, the central banks of Turkey and Iran have allocated a credit of 5 billion lira ($1.4 billion) and its equivalent in rials to their respective agent banks, to be used as letters of credit with a repayment period of one year for both countries’ traders, the Central Bank of Iran’s official website reported.
Iran and Russia are also working for the integration of both countries’ payment systems. The first stage of the process will be implemented in the next three months, the Iranian Financial Tribune reported in late October.
It has been agreed that in the first stage, Iranian citizens, who have a Shetab (Iran’s national payment system) card and Russians who own Mir Business Bank cards would be able to use ATMs of both countries, the CEO of Informatics Services Corporation (ISC) of Iran Seyyed Abu-Taleb Najafi said.
He noted that the next phase of the plan would be to integrate Iran’s payment system with international networks. Earlier in October, ISC signed a deal with Russia’s BPC Company to develop a national platform to link international card payment systems with the Iranian system.
Najafi elaborated that the process of establishing infrastructures for integration with international payment systems would take at least 10-12 months. “We need to wait and see how negotiations between CBI and foreign payment companies like China’s UPA and Japan’s JCB conclude,” he said.
Early this month Iran and Pakistan signed a currency swap agreement to enhance bilateral trade, said Mehdi Honardoust, ambassador of Islamic Republic of Iran to Pakistan.
This agreement will open up channels in the central banks of both countries for trade transactions to reduce the use of dollar accounts for Letter of Credit (LC) clearance.
The arrangement is being carried out in addition to setting up a banking channel between the two countries by the two central banks.
So, applying the currency swap instrument enables Iran to channel trade-related international payments with a number of its key partners, particularly regarding the sale of oil without the US dollar.
There may be some disadvantages due to the high inflation rate in the first place, instability of macroeconomic environment, relatively limited liquidity of the currency market and limited geography of foreign trade operations.
In any case, it has yet to be learnt how smoothly the mechanism of bilateral currency swap works in Iran’s economic environment in the long term.
This article originally appeared on trend.az.