According to Central Bank of Iran, as part of the agreement to use Iranian rial and Turkish lira between the two countries' central banks, Bank Melli opened the first such L/C on April 16 to finance Iranian trade with Turkey, CBI's website reported.
Turkey and Iran’s central banks formally agreed in October to trade in their local currencies. The agreement had been discussed earlier during Iranian President Hassan Rouhani's visit to Turkey followed by a draft agreement between the governors of the two countries' central banks.
Under the deal, the Iranian rial and Turkish lira will be easily converted to help reduce the costs of currency conversion and transfer for traders. The countries had been using euros in the past, as Iran is barred from using the US financial system, according to Financial Tribune.
According to the agreement, the central banks of Turkey and Iran have allocated a credit of 5 billion liras ($1.4 billion) and its equivalent in rial to their respective agent banks to be used as letters of credit with a repayment period of one year for both countries' traders.
CBI said on Monday that the deal was significant considering the high volume of trade between Tehran and Ankara (at roughly $6 billion) and would considerably improve banking and trade relations between the two neighbors.
Turkish President Reccep Tayyip Erdogan said last year the deal was aimed at raising Turkish-Iranian trade volume to $30 billion.
The deal is in line with Iran’s efforts to bypass unilateral US sanctions, which remain intact despite the lifting of international financial sanctions on Tehran last year under a 2015 nuclear deal between Iran and six major powers, including USA.
American banks are still prohibited from doing business with Iran.
European lenders also face major problems, notably over rules prohibiting transactions with Iran in dollars from being processed through the US financial system.
Iran has secured banking ties with a limited number of smaller foreign institutions as major foreign banks remain wary of US sanctions.
"In this model, there would be no need for settlement in any third currency like the US dollar or euro, and the purchase and financial transactions will be directed toward the banking system and lower the operational risk for the two countries' merchants," the CBI statement reads.
It adds that as part of the model, Iranian traders will receive lira for their transactions.
Keeping Up the Momentum
CBI adds that it is pursuing currency arrangements with Iran's major trade partners to facilitate trade relations, employing international payment tools and reducing the risk of foreign exchange operations.
Iran, which has seen a steep slide in its currency in the past months, has sought to shift to other currencies to shield itself from external shocks to its economy.
Tehran announced in March that purchase orders by merchants based on the US currency would no longer be allowed to go through import procedures.
Last week, the country moved to unify the exchange rate for the US dollar at 42,000 rials after the currency market became embroiled in its worst crisis in five years.
Turkey's lira has also hit record lows for the past week, due to what analysts say is the Turkish government's unwillingness to balance monetary policy to counter double-digit inflation.
And the fall has been accelerated by geopolitical uncertainty over US and Russian military actions in neighboring Syria.