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Iran and Russia are close to an agreement on an alternative interbank messaging system that would allow both nations to de-dollarise for bilateral trade, payments and foreign exchange purposes.
Speaking to Russia’s RIA news service, one of Iran’s top diplomats said the two countries had each proposed their own solution for a SWIFT alternative and that an agreement between them has “practically been reached”.
“Naturally, two states that seek to de-dollarise their monetary transactions must have their own interbank system, similar to SWIFT,” said Mehdi Safari, Iran’s deputy foreign minister for economic diplomacy.
“Now in the Russian Federation there is an analogue — the System for Transfer of Financial Messages (SPFS) — and we are planning to create a similar system between Iran and Russia.”
Additionally, Safari said that Iran will soon become the latest country to accept Mir, the card payment network owned and operated by the Bank of Russia and launched in 2015.
Safari noted that Mir payments were discussed earlier this month when Iran’s central bank governor, Ali Salehabadi, travelled to Moscow to meet with Russia’s deputy prime minister and CEOs of major Russian banks.
“Our countries’ leaders have set a goal to further promote cooperation,” said Alexander Novak, deputy prime minister of Russia, in a statement marking Salehabadi’s visit.
“Our companies are interested in intensifying trade, so the development of cooperation in the financial and banking sector is among our priorities.”
A new special relationship?
Novak’s comments point to a new special relationship emerging between Russia and Iran, and highlight the many spheres of cooperation that the two countries are currently pursuing.
Already, Novak noted that trade volume between Russia and Iran hit an all-time high of almost $4bn in 2021 — an increase of 81 percent over the previous year.
2022 will also be a record-breaking year for trade between the two countries, given that volume has already increased by 31 percent so far.
Although Iran represents only a mid-sized trading partner of Russia, the relationship has symbolic significance given their shared goal of challenging US dollar supremacy.
After meeting with Novak, Salehabadi said that increased use of the rouble and Iranian rial in trade transactions could become a “key tool” in stepping up investment and cooperation between the two countries.
“The use of global currencies like the US dollar is not only an economic tool but also a political tool,” he said. “Those who oppose the US’s unilateral actions end up being sanctioned.”
The two countries also reiterated their support for a free trade agreement linking Iran to the Eurasian Economic Union (EAEU).
A temporary agreement on such a free trade zone was ratified by Russia in July and, if made permanent, it could allow for trade barriers to be removed on up to 80 percent of the volume traded between the two areas.
The EAEU includes Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia as full members, with Cuba, Moldova and Uzbekistan as observers.
How serious is Russia about regional payments leadership?
Russia’s invasion of Ukraine, and its subsequent scramble for new allies and trading partners, was not the beginning of Russia’s regional payments ambitions.
Such ambitions go back at least as far as 2014, when Russia narrowly avoided being disconnected from SWIFT due to its military action in Crimea.
This prompted the Bank of Russia to start developing both Mir and SPFS from 2014 onwards, with the first Mir cards being issued in 2015.
Mir now accounts for more than 25 percent of all card transactions in Russia, over 30 percent of new card issuance.
Mir payments are currently accepted in ten jurisdictions outside Russia — Turkey, Vietnam, Armenia, Uzbekistan, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, South Ossetia and Abkhazia — and more new markets aside from Iran will be added shortly, according to the Bank of Russia.
Likewise, in 2020, SPFS processed one in five domestic interbank messages in Russia (doubling its total from 2019), and has since grown to more than 400 Russian entities as of year-end 2021.
In March this year, a report from French credit insurer Coface also revealed that at least 40 entities had connected to SPFS by year-end 2021, mostly from post-Soviet countries but also from Germany, Switzerland, France, Japan, Sweden and Turkey.
In April, Bank of Russia governor Elvira Nabiullina told Reuters that SPFS now counts 52 foreign entities, but their names will no longer be disclosed publicly.
She added that the disconnection of Russian banks from SWIFT has only made foreign banks more willing to join SPFS.
Nonetheless, Andrew Gomez, managing consultant at international payments analysts Lipis Advisors, said that although Russia is serious about building new its regional payments corridors, there is still a long way to go for these systems to be of any practical significance in the global market.
“Mir is going to require due diligence between banks on both sides and so that's why these kinds of networks take a long time to get set up,” he said.
“Overall, the actual connecting to the network isn't really a high cost when implementing a new system: it's that background work around trust and certainty that adds to the costs and to the time required to join.”
With regard to further expansion of Russia's regional payments initiatives, Gomez said it is unclear whether targeting similar pariah states such as Iran will help or hinder these efforts.
“I do think it's important from the perspective of showing other markets that Russia is serious about the Mir system, for example, but we'll see in the near future to what extent Iranian banks are able to access it and how well those bilateral trades are working,” he said.
“Personally, I'm waiting for a more relevant market to go on this network — a good example of which would be India, which we know is importing more fossil fuels from Russia.
“It would be different if a country without the reputational issues of Iran used a Russian network like this, but I think that countries like India have just seen an opportunistic way to get discounted oil, and that doesn't mean that there's a larger shift in their geostrategic planning.”
