What Should Iran Ask of China?
Part 8 (Payment System)
An Iranian minister visits China in January of 2022 to sign a 25-year economic cooperation program between Iran and China. As he returns, there is an unsolved question on his mind: “What should we ask of China?”
Well, this article tries to tackle that question.
In my previous article I tried to emphasize contributions that China could have on Iranian Science and Information Technology. Here I expand on what Iran could learn from China on Payment System.
Payment System
Due to US sanctions against the Islamic Republic of Iran, Iranian Rial has lost its power to engage globally for more than forty years. The feeling of being traumatized by a new sanction consecutively has changed Iranian administration’s mindset to secure the economy in a way that the global economy will have the least effect on it. But Iranian Rial has not only been hit by foreign forces, but lack of vigilance and frequent changes of the Central Bank are other reasons that Rial is weakening against USD. For instance, Dr. Hemmati, one of the most proficient heads of the Central Bank of Iran (CBI) were only in power for less than three years since 2018. Even though his solid actions are persisting since then, his reign didn’t last enough to complete the mission. To understand his hard time making decisions we need to go through some pages of history:
Four years after the invention of the first ATM machine in 1969, a bank in Tehran purchased 6 of these machines and installed them. An incident that could mean that Iran had entered the field of electronic payment before Japan, but it stopped after a short period of time. Only in the 1990s, some state banks introduced ATMs through debit cards. The number of POSs were limited to 600 and a few ATMs. Even though machineries ware imported, transaction fee method that the CBI implemented are still a unique system which was developed domestically. POS-fee system in Iran was introduced in a way that neither the card holder nor the merchant paid any fee. Contrary to other countries, the Iranian model is inverted because the card holder and the merchant use the system but the bank pays the relevant fees as subsidy. The bright side of this method was the rapid expansion of Iran Payment System.
Dr. Hemmati changed the game by keeping a tight rein on it, through taking direct tax from merchants. He made sure that POSs were directly connected to merchant’s main bank account, and he also limited the issuing of Gift Cards and Travel Cards for foreigners. His main concern was to prevent money laundry and take control of liquidity. But in a region where most of its transactions were in cash, the firm Iranian payment system, which could easily be taken to neighboring countries, was a big fish in the blue ocean. Iranian Payment System was first growing in Iraq, Turkey, Armenia, Azerbaijan, Turkmenistan, Afghanistan and Pakistan, to provide services for traders along the border. But Iranian Banks took another step further by establishing POS Nursing companies in their neighborhood. This had two opponents:
1. Dr. Hemmati as head of the CBI opposed this action directly. His main concern was difficulty of taking fees from a foreign merchant and the possibility of foreign merchants using POS to exchange Rial to USD, which could directly result in weakening Rial. He started by limiting transaction value per swipe to 500 million Rial which was about 10,000 USD at 2018 (currently about 2,000 USD), preventing huge amounts of money transferred. He prohibited Travel Cards without valid authentication, making it almost impossible for a foreigner to obtain a Travel Card. Mass distribution of gift cards was also banned and Iranian POSs abroad were recollected.
2. The availability of Iranian Payment System in neighboring countries meant evading sanctions from Trump administration’s point of view. Therefore, the CIA warned Central Bank of Iraq to cooperate with Iraqi Police to collect Iranian ATMs and POSs from major cities of Iraq on 2017. A few ATMs were removed from the streets of Karbala and a few POS-nursing-companies were shut down. Moreover, an Iranian ATM specialist was jailed for 3 months in a cell alongside jihadi captives of the Islamic State of Iraq and Sham (ISIS). A series of actions that led Iranian banks out of Iraq.
US sanctions, as well as Dr. Hemmati’s decisions on this matter, paralyzed the presence of Iranian Payment System abroad. For Trump, it was a duty, but for the CBI, it was nothing but a negligence — a trench which is a direct result of being under sanctions for more than 40 years without creating a solution.
China has been the main importer of Iranian crude oil for decades. The secret in importing Iranian oil is being able to pay back in cash. But what is so peculiar about Chinese banking system that allows payment for Iranian crude oil?
Offshore Accounts or Non-Resident Account: China has introduced offshore bank accounts for foreigners active in Special Economic Free Zones. Due to the risk of liquidity being transferred from these accounts, only limited banks are allowed to open an Offshore Account for a foreign company, therefore funds can only be in use for non-domestic activities. An Offshore Account has more privacy (in fact, Chinese banking regulatory does not consider these accounts as domestic, so it does not control the foreign money as strictly). However, China allows engaging a local company to transfer to or from an NRA account by providing sufficient documents. This means Central Bank of China can control money flow and direct it towards whatever considered priority by administration, i.e., offshore accounts benefit central government through Foreign Direct Investment.
Central Bank of Iran could implement the very same method and even improve it by a few inventions. Iran is desperately in need of USD injection to its economy, but not many investors find it beneficial to invest in Rial. On the other hand, the CBI considers such actions as dollarizing the economy, so it does not see USD accounts as a solution. The key here is to provide POSs that work outside Iran and can be controlled by IP and accept USD/Euro as the main currency while saturating neighboring countries by such accounts and machineries. To open such accounts, a foreigner injects USD/Euro to Iranian banks and uses USD POS only abroad. This method is best for the CBI to collect USD liquidity and to encourage foreigners to invest through a stable currency, while engaging USD to Rial and improving Rial value. Solutions like these also could help Iranian businesses export and import freely.
