During early 2023 there were reports that Iran was looking to create a gold backed digital currency to use for settlement with Russia. At the time, Russian law wouldn’t support settlement with gold backed tokens. However, that’s changed. Now, Russian newspaper Izvestia spoke to Iran’s trade attaché at the embassy in Russia, Rahimi Mohsen. He says the two countries are working together to address settlements using central bank digital currency (CBDC) and Russian digital financial assets (DFAs), the legal framework for tokenized assets.
With sanctions, the two countries are locked out of Swift for cross border payments and can’t easily trade in dollars or euros. Hence, they have resorted to local currency payments, which may not be ideal.
When the topic of the Iran-Russia digital currency arose in 2023, digital financial assets such as tokenized gold were not allowed to be used for payments in Russia. However, last month Russia passed legislation allowing their use for cross border payments precisely to skirt sanctions.
That said, ACRA, the local rating agency, discussed the practicality of using tokenized commodities in February. Iranian counterparties would have to onboard to the DFA platforms to use digital financial assets (DFA) such as tokenized gold. They’d likely need to open a Russian bank account as well. Given that friction, ACRA suggested the creation of “an international exchange operator capable of connecting Russian information systems with foreign platforms.” That looks like a time consuming solution.
Perhaps for this reason, the countries are also exploring CBDC.
Cross border CBDC
There was also a blocker for using cross border CBDC. When Russia drafted its CBDC legislation, it included amendments allowing foreign banks to hold a CBDC. However, the central bank didn’t have a framework to support this, so it developed appropriate by-laws. Reports state this will be effective from January 1, 2025. Hence, this is likely the earliest date for Russian-Iranian CBDC settlements.
According to Izvestia, CBDC might address another challenge the trading partners face – the discrepancy between the market exchange rate and the state rate in Iran. However, we’d expect market rates to be more favorable for Russia, whereas a wholesale CBDC might lock in the less appealing state rate.
Russia originally planned to start exploring cross border CBDC in the first quarter of 2023. However, the legislative go ahead for a CBDC only came in mid July 2023, which likely delayed the work. Russia said it would explore two modes of interconnectivity, a shared platform for multiple CBDC and bilateral linking of domestic CBDCs.
Lately the Chinese renminbi has become the dominant currency for Russian cross-border payments. China developed the technology for mBridge, the cross border CBDC shared platform. However, this is being developed under the auspices of the Bank for International Settlements (BIS), which is unlikely to condone Russia as a participant.
In the meantime, the five nation BRICS trade alliance, currently chaired by Russia, recently expanded to ten members, including Iran. It is discussing a potential BRICS Bridge, which sounda similar to mBridge. Russia plans to deliver recommendations on the topic later in the year.
