The Functioning of Bilateral Currency Swap Agreement in the International Payment System: with emphasis on Economic Sanctions

The dependency of the payment systems on use of international currencies such as dollar in Iran's cross-border trade has led to a growing vulnerability of the Iranian economy against economic sanctions. Accordingly, aware of this, the United States has attempted to impose financial sanctions which have severely disrupted Iran's international financial transactions. Meanwhile, in light of reducing the negative impact of financial sanctions, Bilateral Currency Swap Agreements (hereinafter BCSAs) are intended to facilitate the flow of payments in cross-border trade between countries by eliminating the use of international currencies. With regard to a distinction between money functions, the aforesaid agreements merely use international currencies as a basis for accounting in BCSAs and therefore, make payments to national currencies. The establishment and implementation of these agreements would ideally result in strengthening the position of the national currency in international economic relations and reducing the negative impacts of economic sanctions. Indeed, the agreements necessitate certain prerequisites to be followed; otherwise it would lead to weakening domestic industries and depreciating the Central Bank reserves. In the present article, through scrutinizing of the foregoing, we aim to provide a functional perspective of the establishment and implementation of BCSAs under economic sanctions.