Western Sanctions Challenge and Restrict Ruble-Rial Trade Between Iran and Russia

On December 25, 2023, during the Supreme Eurasian Economic Council summit in St. Petersburg, the Russian-dominated Eurasian Economic Union (EAEU) and Iran inked an extensive free-trade agreement (FTA). Representatives from Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, Iran, and Chairman of the Eurasian Economic Commission Board Mikhail Myasnikovich all signed the agreement. The move represented an upgrade from the original preferential trade agreement between Tehran and the EAEU (Mehr News Agency, December 12, 2023; The Russian Government, December 25, 2023). Iranian-Russian economic and commercial ties as well as political and military relations have grown significantly over the past few years. Both countries are under Western sanctions, and numerous bilateral and multilateral agreements have been concluded within the frameworks of the EAEU, Shanghai Cooperation Organization, International North-South Transport Corridor, and, recently, the BRICS format (originally a loose grouping of Brazil, Russia, India, China, and South Africa) in an effort to ameliorate the detrimental effects of the sanctions regime. Additionally, Moscow and Tehran have tried to transition to rubles and rials for bilateral trade as opposed to US dollars, though several challenges have effectively restricted that adjustment.

The volume of trade between Iran and Russia increased from $1.5 billion in 2020 to about $5 billion in 2023. During recent talks with Iranian President Ebrahim Raisi in Moscow, Russian President Vladimir Putin declared, “Our [bilateral] trade turnover increased by 20 percent last year and achieved good results” (TASS, December 7, 2023). Earlier, in March 2023, President of the Russian Chamber of Commerce and Industry Sergey Katyrin announced that trade between Russia and Iran had increased by 20 percent in 2022 to $4.8 billion (Eco Iran, September 23, 2022; TASS, March 1, 2023). Other Russian officials have estimated that this volume will reach $7.5 billion by 2025.

Financial and banking cooperation between Russia and Iran has also increased significantly. Bypassing sanctions and financial pressures from the West and replacing the dollar and euro with the ruble and rial have been the main tenets of cooperation between Tehran and Moscow in this regard over the past two years. In a meeting with Putin in Tehran in July 2022, Supreme Leader Ayatollah Ali Khamenei suggested “the dollar should be slowly removed from the path of global transactions” and approved the use of national currencies in place of the US dollar for trade with Russia (Tehran Times, July 19, 2022).

Several recent agreements have been reached between the central banks of Iran and Russia in pursuing this goal. The head of the Russian Central Bank, Elvira Nabiullina, visited Iran for the first time in May 2023 to meet with her Iranian counterpart, Mohammad Reza Farzin, to strengthen banking ties between the two countries (The Moscow Times, May 24, 2023). Additionally, the role of Mir Business Bank, the Russian branch of Iranian state-owned Bank Melli in Moscow, Astrakhan, and Kazan, has increased significantly (Bank Melli Iran, October 29, 2023). Most recently, in December 2023, Farzin shared that Iran and Russia have laid plans to sign an agreement in the first fiscal quarter of 2024 on the strict use of rubles and rials for bilateral banking cooperation (Vesti.az, December 29, 2023).

Due to Western sanctions, Moscow and Tehran continue to search for alternatives in expanding trade without access to the global SWIFT financial system. SEPAM and SPSF, the national financial messaging services of Iran and Russia, respectively, have connected as a partial solution to this problem. In 2023, the two countries finalized bilateral agreements to integrate Russia’s Mir Payment System with Iran’s Shetab Banking System, and Russia’s VTB Bank opened an office in Tehran (Mehr News Agency, January 29, 2023; Tasnim News Agency, May 20, 2023; Fars News Agency, May 20, 2023).

The use of rials and rubles in Iranian-Russian trade has thus far increased by 60 percent (Tasnim News Agency, June 2, 2023). This process, however, faces several serious challenges on both sides. First, there is a severe trade imbalance between Iran and Russia, which has thrown off exchange rates. As this author wrote in September 2023: “The volume of trade between the two countries is $5 billion, of which almost $4 billion are Russia’s exports to Iran and almost $1 billion are Iran’s exports to Russia. So, there is a ruble deficit equivalent to $4 billion. Under these circumstances, the demand for rubles is very high” (Valdai Club, September 20, 2023).

Second, the devaluation of both national currencies and the extreme fluctuations in the exchange rates of the rial and the ruble against the US dollar have hampered the transition process. As pointed out last year, “the dollar/ruble parity exceeded 98 [percent] for the first time since March 2022, and the ruble lost about 0.88 percent against the dollar on the third trading day of every week” (Anadolu Agency, August 9, 2023). Despite the agreements to eliminate the dollar, Iranian and Russian businessmen use the dollar as the monetary basis for their negotiations and agreements. After fulfilling obligations, they then convert values into rubles and rials. As this author observed last year, “Fluctuations in the exchange rates of the ruble and the rial against the dollar often cause serious problems between the parties and may cause serious damage” (Valdai Club,  September 20, 2023).

Third, the process of exchanging rubles into rials has been fraught with difficulties. Iran has two main exchange rates: an official rate and a free-market rate. While the free-market rate is about 520,000 rials (52,000 toman) to $1, the official exchange rate is about 430,000 rials (43,000 toman) to $1. The rial is the official currency, but Iranians use the toman in everyday life. One toman is equivalent to 10 rials. The government-subsidized rate values the rial far above the free-market rate. This approach is a way to preserve foreign currencies and allocate funds to import essential needs. The ruble to rial exchange rate is the same. While the free-market exchange rate is about 50,710 rials (5,710 toman) to 1 ruble, the official exchange rate, set by Mir Business Bank, is about 47,000 rials (470 toman) to 1 ruble. As previously stated, “Due to the price difference between the ruble rate set by Mir Business Bank and the free-floating rate … this process causes losses to Iranian traders and exporters and reduces their motivation to trade with Russia” (Valdai Club, September 20, 2023).

Overall, important challenges and restrictions prevent Tehran and Moscow from fully exploiting the benefits of this new process. Even though the share of rubles and rials in bilateral trade has reached 60 percent, significant challenges remain in continuing the transition away from the dollar. Russia and Iran, however, will likely press on with this process in an effort to create more breathing room for themselves in circumventing Western sanctions.