Reconnection of Iran and SWIFT: The End of a Nightmare

The reconnection between Iranian banks and the international SWIFT network, established on February 1 according to Valiollah Seif, the Governor of the Central Bank of the Islamic Republic, is one of the most significant steps towards ending Iran's economic sanctions. This marks the beginning of rebuilding the communication bridges between Iran's banking system and the global banking network, bridges that collapsed over a period of about four years, severely impacting the country's international economic relations. SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, was founded 43 years ago with the participation of 239 financial institutions from 15 countries to create a common language for international financial transactions. The establishment of this entity aimed to meet banking needs in an economy rapidly moving towards globalization. Given the expansion of international exchanges and the exponential increase in communications between financial institutions in various countries, messages exchanged between these institutions must be written based on identifiable standard codes to achieve three main objectives: improving security, increasing speed, and reducing banking transaction costs. Currently, SWIFT, which operates under Belgian legal supervision and has its headquarters in Belgium, encompasses over 11,000 financial institutions that exchange more than six billion messages annually, moving hundreds of billions of dollars across 215 countries and economic territories worldwide. Relations between Iran and SWIFT began in 1993, with the Central Bank and five commercial banks (Export, National, Trade, Mellat, and Sepah) being the first financial institutions in the country to join SWIFT. The number of Iranian members of this entity reached 26 financial institutions before sanctions were imposed. To understand the importance of SWIFT for Iran's international transactions, it is sufficient to note that according to an assessment by the Research Center of the Parliament, the Central Bank of the Islamic Republic exchanged over 100,000 financial messages (incoming and outgoing) with this entity in 2010, and the volume of money moved through these messages that year reached $274 billion. With the intensification of economic sanctions against the Islamic Republic, Iran lost this fundamental lever for international banking transactions. On March 17, 2012, in a joint meeting of representatives from EU member countries and the management council of SWIFT, this entity removed Iranian banks from its international networks, accusing them of participating in violations of EU sanctions against Iran. The severance of relations with SWIFT created a mountain of problems for international monetary transactions and foreign trade in the country. It should not be forgotten that in international trade, a significant portion of exports and imports of goods and services relies on letters of credit, and the exchange between buyers and sellers is essentially conducted through their banks. Without SWIFT, the entire transactional system of the country was immobilized. Initially, the severance of relations with SWIFT was mocked by some senior officials of the Islamic Republic, but as the devastating consequences gradually became apparent, discussions arose about resorting to 'alternative methods,' including the 'Financial Electronic Messaging System' (PEM), which the Islamic Republic designed to 'overcome the pressures resulting from intensified international sanctions.' There was also a belief that in the absence of communication with SWIFT, Iranians engaged in international economic relations could easily use the internet, fax, or even the old telegraph method. Under the pressure of sanctions from SWIFT, currency exchanges increasingly replaced banks in the country's international transactions, without being able to offer their services. The use of these methods did not resolve the country's blocked situation. Instead, under the pressure of sanctions from SWIFT, currency exchanges increasingly replaced banks in the country's international transactions, without being able to offer their services. Given the strict regulations imposed on the international banking system to combat terrorism and money laundering, how could Iranian currency exchanges become reliable intermediaries for Western financial institutions? As a result, Iran's foreign transactions increasingly shifted towards countries whose banks could escape the grip of stringent laws, and even in these transactions, very heavy costs were imposed on Iranian exporters and importers. In short, following the severance from SWIFT, Iran's risk level in international transactions significantly increased, transaction costs rose, exporters, especially in the private sector, faced more difficulties in exporting their goods, new challenges emerged in importing capital goods and raw materials to meet the needs of production units, and a large portion of the profits that banks earned from foreign transactions was transferred to currency exchanges. Considering all these factors, it can be confidently stated that the re-establishment of relations between Iran's banking system and SWIFT signifies the end of a nightmare for the country's economic actors. Nevertheless, even after the implementation of the Joint Comprehensive Plan of Action (JCPOA) and the re-establishment of normal relations with SWIFT, the complete resolution of the banking system's problems in Iran's international relations (in addition to the various difficulties banks face domestically) requires time and, importantly, will. One of the most significant challenges is the ongoing tension in Iran's relations with the United States and its impact on the relationships that Iranian banks can have with the world. It should be noted that unilateral U.S. sanctions against Iran remain in force in areas separate from the nuclear issue and are embedded in a complex and sometimes ambiguous legal framework. A large number of European banks, which recently faced heavy penalties from the U.S. judicial system for engaging in foreign transactions with Iran (or Sudan and Cuba), are extremely cautious in their dealings with Iranian banks and sometimes even prefer to distance themselves from any relations with Iran until the situation is clarified. Resolving this issue depends on future developments in Tehran-Washington relations. The second problem is the consequences of Iran's separation from international financial and banking relations in recent years. In fact, after the financial crisis of 2007 to 2009, which primarily stemmed from the actions of Western banks, the global banking system underwent significant transformations. The agreements known as 'Basel III,' signed in winter 2010, imposed strict standards on financial institutions to prevent them from becoming a crisis factor and simultaneously increased their resilience in a crisis environment. At the same time, in recent years, numerous regulations have been imposed on the banking system to prevent tax evasion, money laundering, and terrorist financing. Due to sanctions and separation from the international arena, Iran's banking system has remained outside these reforms and currently, to establish normal relations with the international financial system, it must certainly implement these reforms within the framework of laws that will be approved by Iranian legislators.