Both countries are banned from the SWIFT financial messaging system due to US and European sanctions.
Iran and Russia signed a financial messaging agreement on Sunday that would allow their banks to transfer funds between one another, and evade sanctions mechanism that blocks most of their entities from SWIFT.
The memorandum of understanding will allow Iranian and Russian banks to exchange standard financial messages. Officials from both countries held a ceremony in Tehran for the occasion. A Russian official, Vladislav Gridchin, said Western sanctions will not be able to impede the bilateral messaging, the official Islamic Republic News Agency reported.
The two countries had been discussing such an agreement for a year. The Iranian business website Tehran Bazaar said Iran’s Shahr Bank and Russia’s VTB Bank will be involved in a pilot program.
What it means: Financial messaging allows banks to transfer funds between one another. It involves a system of codes that refer to specific banks.
The Belgium-based Society for Worldwide Interbank Financial Telecommunications, aka SWIFT, is the dominant financial messaging system in the world. Banks do not need SWIFT to conduct transfers, but executing such actions without SWIFT means using slower systems and sometimes conducting transactions manually, according to Investopedia.
Why it matters: SWIFT banned nearly all Iranian banks from using its service in 2019 under pressure from the United States. Iranian banks were first banned from SWIFT in 2012, but were allowed to return in 2016 after the Iran nuclear deal was signed the year prior. In 2018, US President Donald Trump removed the United States from the agreement and SWIFT ultimately banned Iranian banks again.
In March of last year, SWIFT banned several Russian banks from the service in response to the invasion of Ukraine, among them VTB Bank.
Establishing their own financial messaging system will enable Iranian and Russian banks to conduct fast financial transactions on their own without the need for SWIFT.
This is not the first action Iran and Russia have taken to help one another defy Western sanctions. Last year, Iran and Russia started trading in their own currencies in order to reduce dependence on the US dollar.