Iran and Russia have finalised an agreement through which they will trade in local currencies instead of the US dollar (the deal will be signed in the first quarter of 2024). The agreement was finalised via a meeting, in the last week of December 2023, between central bank governors of both countries. In July 2022, both countries had indicated that they were planning to use their national currencies instead of the US dollar. Several countries – apart from China and Russia — like India, UAE, Brazil and Saudi Arabia have been moving towards reducing their dependence on the US dollar – referred to as de-dollarization – due to stringent US sanctions on Russia in the aftermath of the Russia-Ukraine conflict. There has also been a talk of a BRICS+ grouping currency. Iranian President Ebrahim Raisi while supporting the efforts of BRICS towards de-dollarization said: “The Islamic Republic of Iran very resolutely supports the successful endeavors of BRICS in line with de-dollarisation from the trade and economic interactions between the members and also making use of local currencies.”
Growing Iran-Russia proximity: Economic and strategic factors
The recent agreement between Iran and Russia is important for several reasons. First, it is yet another reiteration of strengthening ties between Iran and Russia in a changing geopolitical landscape. Russia and Tehran have both provided support to the Assad regime in Syria – though there have been differences regarding Iran’s take-over of some important strategic and economic interests like the Port of Latakia. The US withdrawal from the Iran nuclear deal in 2018, the Russia-Ukraine and the Israel-Palestine conflicts have given a further fillip to bilateral ties between Tehran and Moscow. In the aftermath of the Russia-Ukraine conflict, both countries have been working towards circumventing US Sanctions. They began connecting payment systems outside the swift system. In January 2023, while making this announcement, the Deputy Governor of Iran’s Central Bank Mohsen Karimi said: “about 700 Russian banks and 106 non-Russian banks from 13 different countries will be connected to this system.”
Earlier in 2023, Iran’s Ambassador to Russia had said that 40% of bilateral trade was in Roubles.
Russia has limited economic options and with the chances for revival of the Iran nuclear deal dimming Tehran also needs to explore all available options. Iran is facing several economic challenges such as rising inflation. Iran’s religious leader in an address in January 2023 had flagged the point that Iran was a “decade behind” because of sanctions and needed to put its economy back on track to retain its global relevance.
It would also be pertinent to point here that Iran and the Russia led Eurasian Economic Union (EEU) also signed a free trade agreement on December 25, 2023. This agreement will eliminate customs duties on 90% of goods. A strong reiteration of strengthening economic ties between Tehran and Moscow is the fact that the latter accounts for a significant percentage of Russia’s Foreign Direct Investment (FDI) in Iran for the period of 2022-2023.
In the strategic sphere as well ties between both countries have witnessed an upswing. Iran supplied drones to Russia, while it has already finalised an agreement for purchasing Su-35 fighter jets, Mi-28 attack helicopters, and Yak-130 jet trainers. Both countries are also working out an agreement which will enhance strategic ties.
The De-dollarization aspect
If one were to look beyond the bilateral context, the decision of Russia and Iran to trade in local currencies is another reiteration of countries seeking to move towards de-dollarization in a changing geopolitical context as has been discussed earlier. There has been a significant rise in sale of oil in non-dollar currencies. Other countries which have been trading in non-dollar currencies are UAE and India, Brazil and China and Saudi Arabia and China. The expansion of BRICS grouping – with Saudi Arabia, Iran, the United Arab Emirates, Ethiopia and Egypt as members – is likely to enhance its influence over the global economic landscape with an increase in the organization’s share in global trade. This point was acknowledged by the US, with US National Security Advisor, Jack Sullivan in an article, who went to the extent of saying: “The BRICS+ nations do not need to wait until a shared trade currency meets the technical conditions typical of global reserve currency before they swing their newly enlarged economic wrecking ball at the dollar.”
Given the geopolitical situation, especially tensions between China and India — the prospects of a BRICS common currency is dim.
Despite the rise in non-dollar trade, the dollar is likely to remain the dominant global currency. The US dollar still accounts for 58% of global foreign exchange reserves (in 1999 this number was estimated at 70%). Several commentators have argued that while the importance of several currencies may rise – especially in the commodity markets – it is important to understand that the dollar is here to stay as the world’s primary trade and reserve currency.
The recent agreement signed between Iran and Russia is important not just in the context of bilateral ties and the geopolitics of the Middle East and beyond, but also underscores the changes taking places in the global economic landscape.
[Photo by www.kremlin.ru, via Wikimedia Commons]
The views and opinions expressed in this article are those of the author.
Tridivesh Singh Maini is a New Delhi based analyst interested in Punjab-Punjab linkages as well as Partition Studies. Maini co-authored ‘Humanity Amidst Insanity: Hope During and After the Indo-Pak Partition’ (New Delhi: UBSPD, 2008) with Tahir Malik and Ali Farooq Malik. He can be reached at [email protected].
