Euro-Based Payment Arrangement for S. Korea-Iran Trade
South Korean companies will be able to settle accounts with their Iranian counterparts in the euro currency instead of the local won from as early as September, allowing more convenient monetary transaction with the Middle Eastern country whose economy offers a wide range of business opportunities after international sanctions were lifted earlier this year.
The euro-based payment system is expected to pave the way for Korean businesses to speed up $45.6 billion worth of bilateral projects that have been sealed in May during President Park Geun-hye’s visit to Iran, the Korean news website Pulse reported Monday.
According to multiple sources from the financial industry on Sunday, the United States government has indicated it would condone South Korean companies to make payment in euro, a currency largely favored by businesses in the Persian Gulf country.
Korean companies had been under compliance of US-led sanctions on Iran over its nuclear program. Seoul still needs to confer with Washington on+ the scope of reviving trade and launching new business ventures as the sanctions fade.
Upon green light from Washington, Korea will start trial run in the new payment system as early as next month before full-fledged service. The euro-based payment system allows Korean financial institutions to make monetary transactions in euro via European banks as intermediaries. Under the system, Korean companies would send money to European banks that would exchange won into euro before transferring the money to Iranian banks.
So far, Korean businesses in industries including construction, shipbuilding, and automobile, have received payment in won via accounts named under the Central Bank of Iran managed by Woori Bank and Industrial Bank of Korea. Likewise, Iranian companies promoted trade with their Korean counterparts by receiving payment from the CBI. There have been no actual money transfers between Woori Bank, IBK and Iran’s central bank.
The euro-based payment system is expected to accelerate projects worth $45.6 billion that have been provisionally signed between Korea and Iran in May.
Korean shipbuilders have already signed 3 trillion won ($2.7 billion) worth of memorandum of understanding with Iran while state utility firms Korea Gas Corporation and Korea Electric Power Corporation are each engaged in multi-billion-dollar energy projects. Six construction firms including Hyundai Engineering & Construction Co. have also been selected as the preferred bidder for an order for a hospital construction project worth 2.3 trillion won last month.
Korean policy institutions are also moving swiftly to benefit from the Iranian boon. The Export-Import Bank of Korea has introduced a $15 billion financial package support for local businesses. It is also in last-minute talks with the CBI in signing a financing deal to support exports.
The Korea Trade Insurance Corporation has also sent a draft of a contract to Iran that includes €5 billion in export financing support. The corporation expects the contract to go through in September at the earliest if the euro-based payment system launches on time.
Iran, which is a major trade partner for Europe, has long preferred payments in euro. However, this has been impossible for Korean firms when promoting trade with their Iranian counterparts as they must first be converted into dollars which could go against US sanction rules. Korean firms have long been campaigning for euro-based payment system to expand their trade with Iran.