Russia and Iran have begun to take small – but potentially significant – steps to remove the US dollar from their bilateral trade, with the launch of a settlement system using their own currencies.

The Iran Currency Exchange (ICE) listed the rouble-rial pair in July, following a trip to Moscow by Iranian central bank governor Ali Salehabadi. earlier in the month.

The new arrangement means that the two countries can now settle their trade debts in each other’s currencies. The first exchange took place on July 19, with an exchange of 3 million rubles ($48,000). It is also the day Russian President Vladimir Putin arrived in Iran for talks with President Ebrahim Raisi and Supreme Leader Ali Khamenei.

Iranian media reported that the new system could reduce demand for dollars by $3 billion a year. Bilateral trade between Iran and Russia was worth $4 billion in 2021 but, finding common cause in their outcast status in the west, the two countries say they hope to boost bilateral trade to $8 billion short term.

The new trade agreement allows them to avoid the use of dollars and in doing so also avoids the impact of some international sanctions. Both countries are subject to sweeping trade embargoes by the United States and others – in the case of Russia due to its invasion of Ukraine in February; in the case of Iran because of its nuclear program and other problems.

Iranian officials say they hope to expand the new bilateral settlement system to include the currencies of other key trading partners, including the Turkish lira, Indian rupee and United Arab Emirates dirham.

“We will offer other currencies in the future to have a diversified basket and reduce the influence of currencies like the dollar,” Salehabadi said on July 21.

If this happens, it will have the effect of creating a network of agreements allowing Iran to trade without resorting to the dollar or the euro. However, those involved on the other side of the deal may still be wary of the risk of being caught up in secondary sanctions.

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Iranian Deputy Foreign Minister for Economic Diplomacy Mehdi Safari has also floated the idea of ​​developing a new interbank messaging service between Iran and Russia. This could serve as an alternative to Swift, the main international system currently in place, which operates from its headquarters in Belgium.

Many Russian and Iranian banks have found themselves locked out of the Swift system as part of the sanctions imposed on both countries.

Russia already has its own banking messaging system, SPFS (Sistema Peredachi Finansovykh Soobscheniy), which was set up after the 2014 invasion of Crimea. FinancialTimes reported in March that this is increasingly being used by banks for payments within the Eurasian Economic Union – a group that includes Russia’s neighbors Armenia, Belarus, Kazakhstan and Kyrgyzstan. Iran has also considered joining this system.

More recently, in June, Russia’s Rostec said it had developed a blockchain platform called CELLS, which could replace Swift.

Speaking to the media in late July, Iran’s central bank governor Safari said: “Two countries that want to de-dollarize their transactions must have a special system similar to Swift… We have practically reached a very good OK”.

In pursuing these initiatives, Russia and Iran are following the example of other countries that have sought to reduce their dependence on Western networks.

China has developed its own interbank settlement system called CIPS which has been operational since 2015. In April, Russian Finance Minister Anton Siluanov called for payment systems in BRICS countries (Brazil, Russia, India, China and South Africa) are more closely integrated.

However, such alternatives have significant limitations. In particular, they can be slower, more expensive, and more error-prone.