While the nuclear deal struck between Iran and six world powers in 2015 lifted international sanctions, it failed to remove primary US restrictions on dollar transactions. As such, some in Iran have grown to view currency swap agreements (CSAs) with other countries as a way to overcome remaining US sanctions. This is even though many swaps do not become operational and these kinds of schemes are likeliest to be secured in times of mutual crises and emergency — or in the case of China, to expand trade in one’s national currency at the expense of the dollar’s dominance in global trade.

Iran formally signed its first currency swap deal with Turkey last October, and the two countries recently issued their first local currency letters of credit. This is a major step since the Islamic Republic’s previous memoranda of understanding on this issue with other countries never really came into effect. Nonetheless, the implementation of CSAs involves high risks in volatile economies, such as that of Iran.

In this vein, the Central Bank of Iran (CBI) has in the past highlighted the prerequisites for monetary agreements with other governments. It points to a series of intertwined factors that contribute to the successful conduct of currency swaps. The most significant among the latter are concerns surrounding:

• The exchange rate of the intermediary currencies and their conversion mechanism to settle local currencies.
• The trade balance and outstanding debts between the respective countries involved in the CSAs.
• The political will of the countries and their central banks to implement the deal.

The implementation of swap deals is possible provided that the money regulators of both engaging governments are able to minimize the risk of currency fluctuations in their own macroeconomic environment. At present, due to the high foreign exchange rate volatility in Iran, the CBI is not capable of easing the processing of international exchange transactions in an effective manner. On the other hand, its policy of controlling the currency market has been proven to put at risk Iran’s foreign exchange reserves. While the latter recently helped push down the rial to record lows, it also contributed to Iran’s national currency losing its attraction as an intermediary monetary unit in the inking of CSAs. Indeed, neither Iran nor its peers are in a position to guarantee the extent of the fluctuations of their currencies.