In Tehran's Firdavsi Bazaar, a renowned foreign exchange market, exchange offices, and traders set daily exchange rates by analyzing the conversion rate of the dollar to the toman, the national currency, in two parallel markets outside Iran; Iraq and Afghanistan. Among these, the Sulaimani exchange market in the Kurdistan Region has one of the most significant impacts on Iran's domestic foreign exchange market due to Tehran's strong economic ties with Iraq and the Region.
Valued at $10 billion to $12 billion annually, trade between Iraq and Iran has established Sulaimani as a crucial financial center. Even before 2003, during the era of the Baathist regime in Iraq, the activities and expertise of Sulaimani businessmen made the city a major trade route between Iraq and Iran. Today, Sulaimani has become a major financial hub between the two countries and a significant regional financial center.
With the US tightening the economic sanctions on Iran, especially after withdrawing from the nuclear deal in 2018, the role of the Sulaimani foreign exchange market in stabilizing trade relations between Iraq and Iran has increased. The exchange rate of the dollar and the Iranian toman in Sulaimani has effectively become the representative rate for Iraq.
Since early 2023, the US Treasury Department has enforced further actions to restrict the flow of dollars from Iraq to Iran, exerting constant pressure on the Central Bank of Iraq. However, the foreign exchange offices in Sulaimani operate through a system that appears protected from Washington's sanctions against Tehran. These offices deny any cash is smuggled to Iran or transferred illegally or even legally from Sulaimani.
Iran's monthly exports to Iraq: $900 million
Iran exports about $900 million worth of goods to Iraq monthly, with around 50 percent of this amount comprising Iranian electricity and gas exports to Iraq. The Iraqi government pays for these services in dinars, depositing the funds at the Trade Bank of Iraq. With US government approval, the Iranian government can use about $10 billion of its deposits in the Trade Bank of Iraq to purchase humanitarian goods, such as medicine and food.
Last year, Iraqi and Kurdistan Region businessmen bought and exported about $1 billion worth of goods on behalf of Iran, utilizing Iranian financial resources deposited in the Trade Bank of Iraq. The remaining 50 percent of Iran's exports to Iraq and the Kurdistan Region, valued at around $450 million to $500 million monthly, involves the Iranian private sector.
Meanwhile, the foreign exchange offices in Sulaimani operate an efficient system that facilitates trade between Iraq and Iran without violating US sanctions.
Virtual exchange system between Iran and Sulaimani
Sanctions against Iran prohibit the transfer of any money from a foreign bank to an Iranian bank. Consequently, about $15 million of Iranian companies' transactions are processed daily through a sophisticated system by foreign exchange offices in Iraq, particularly in Sulaimani.
For instance, when an Iranian company exports goods worth 600 million Iranian tomans (approximately $10,000) to the Kurdistan Region or Iraq, the Iraqi businessman deposits $10,000 at a foreign exchange office in Sulaimani, clearing his account with the Iranian supplier. Then the Sulaimani exchange office's partner, or representative, inside Iran deposits 600 million tomans to the Iranian supplier company's account.
This is just one side of the process. What remains is to clear up the accounts of the exchange office in Sulaimani with its representative or partner inside Iran. When an Iranian factory needs to import raw materials from Turkey, China, the UAE, or another country, it has to remit dollars to those countries. Obviously, this cannot be done through banks and exchange offices inside Iran. Instead, currency offices in Sulaimani handle these transactions.
In such cases, the partner of the Sulaimani exchange office in Iran instructs the transfer $10,000 to Turkey, the UAE, or China on behalf of the Iranian company's request, thus clearing his account with the Sulaymaniyah office.
This is just one transaction, but hundreds and even thousands of such transactions are made each day. This system, without the need to transfer physical money, has facilitated all trade between Iraq and Iran and apparently other trade between Iran and other regional countries.
Effect of the Sulaimani currency market on the price of the Iranian toman
The supply and demand for the Iranian currency change daily in the Sulaimani exchange market, affecting the exchange rate of the US dollar against the Iranian toman. Demand for the Iranian currency in Sulaimani depends on how much Iraqi businessmen need to transfer to Iranian accounts or deposit in third countries on behalf of Iranian firms.
Therefore, the exchange rate of the dollar to the toman in Sulaimani impacts the exchange rate in Iran's domestic market. The exchange rates in Sulaimani are a reflection of Iran's foreign trade with countries like China, the UAE, Iraq, and Turkey. If Iran's exports to these countries increase, demand for the Iranian currency in Sulaimani also increases.
Additionally, psychological and geopolitical factors, such as the souring relations between Iran and western countries due to Iran's nuclear program, may reduce demand for the toman in the Sulaimani market, thereby impacting its value.
The Sulaimani exchange market plays a crucial role in determining the exchange rate of the Iranian toman due to Iran's economic activities with Iraq and the Kurdistan Region. This dynamic exchange system not only stabilizes trade between Iran and its neighbors but also demonstrates endurance against international sanctions, underpinning significant trade operations without physical money transfers.
Omer Ahmed is the editor-in-chief of Rudaw Media Network's Economy Desk.