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Hoping To Increase Ties To Global Financial Markets, Iran Signs Currency Agreement With Turkey

By Orkhan Jalilov October 12, 2017

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The two central banks will be able to use international payment tools, including credit lines, to finance trade in local currencies. / Morteza Nikoubazi / Reuters

The central banks of Iran and Turkey have signed a draft Memorandum of Understanding on conducting trade in their own currencies instead of using foreign currencies, in order to facilitate trade and boost direct investment.

“Based on the deal, Iran’s rial and Turkey’s lira can be easily converted into each other, and merchants on both sides of the border can accordingly use those currencies for their trade activities,” the governor of Iran’s Central Bank Valiollah Seif said, according to reports by ILNA news agency. Seif and his Turkish counterpart Murat Chetinkaya signed the MoU draft agreement during a meeting in Ankara on October 10.

The arrangement could help reduce currency conversion and transfer costs. The two central banks will be able to use international payment tools, including credit lines, to finance trade in local currencies. The agreement on currency swap will be finalized in the First Iran-Turkey Economic Commission, for which no date has yet been determined.

"After the Joint Comprehensive Plan of Action, our banking relations can't be compared to the past, as we have suitable banking ties across the world and are able to meet our needs with regard to clearing banking transactions," Seif said shortly after signing the MoU, according to Iran’s Financial Tribune, referring to the landmark agreement signed in July 2015 and better known as the ‘nuclear deal’.

Using local currencies for bilateral financial transactions was endorsed during Turkish President Recep Tayyip Erdogan's visit to Iran on October 4. The two sides agreed to use local currencies as the medium of exchange in bilateral trade, with an expectation that it will help meet their stated goal to have trade turnover reach $30 billion per year. Currently, bilateral trade between Iran and Turkey amounts to about $10 billion per year.

In December 2016, Erdogan offered to trade with Russia, China, and Iran in local currencies in an attempt to boost the falling lira. The president said that proposals have been given to the central bank, and have already been discussed with Moscow, Beijing and Tehran.

“If we buy something from them, we will use their money, if they buy something from us, they will use our currency,” Erdogan had said.

In addition to using national currencies to finance trade, Iran and Turkey are also looking to expand ties in the financial sector by opening local branches of banks in the two respective countries. Since the nuclear deal went into effect in January 2016, Iran has been interested in strengthening its financial ties to global capital markets by opening bank branches in foreign countries.

But the Financial Action Task Force, a multinational watchdog established by the G7 that monitors money laundering and terrorist financing, has declared Iran a country with “high risk and non-cooperative jurisdictions.” The organization has issued statements in the past, advising countries to tell their banks to impose extra due diligence measures on transactions that involve Iranians. As a result, most European banks are still weary of doing business with Iran.