Indian exporters are worried as they have payments of $400-600 million pending in Russia. Sending fresh consignments is also difficult as leading shipping lines have suspended deliveries to and from Russia.
Exporters thus are urging the Indian government to allow rupee-rouble trade as in the days of the Soviet Union. (Representational image: Reuters)
N Chandra Mohan
The financial sanctions imposed by the West on Russia for its military offensive in Ukraine — a number of its banks being removed from SWIFT, a network that connects thousands of financial institutions around the world, besides bans on transactions with its central bank — do create uncertainties for India’s trading relations with Moscow. Indian exporters are worried as they have payments of $400-600 million pending in Russia. Sending fresh consignments is also difficult as leading shipping lines have suspended deliveries to and from Russia. The plunge of the rouble has also made it difficult to firm up fresh contracts. Exporters thus are urging the Indian government to allow rupee-rouble trade as in the days of the Soviet Union.
But how does one reconcile all of this with the fact that rupee-rouble trade has been on the table since Russia annexed Crimea in 2014 which then also triggered western sanctions? India’s relations with Russia may not have the scope and depth of its alliance with the Soviet Union, but they remain time-tested and reliable. More than a decade ago, this relationship was elevated to a Special and Privileged Strategic Partnership. At successive annual summits, decisions were taken to trade in rupees and roubles to bypass sanctions although the joint statements only said that both nations will continue joint work promoting settlement of payments in national currencies.
Although levels of Indo-Russian trade are relatively low at $9.4 billion this fiscal (April-December), a ball-park estimate of the rupee-rouble component is as high as 30%. Russia’s deputy chief of mission Roman Babushkin was quoted in the Economic Times three years ago that in the “past six years, there has been a five-fold increase in payments in national currencies from about 6% to over 30% now. This has made business operations more comfortable and in some ways we were forced to use this practice to avoid a situation when our economic interaction was depending on a universal currency like the US dollar”. Babushkin now feels that this share of payments in national currencies in bilateral trade is only set to rise.
One area where this compulsion to bypass sanctions was felt most acutely was for government-to-government big-ticket defence deals. In 2018, both nations agreed to carry out payments in rupees for five units of S-400 Triumf Air Defense System. The S-400 deal alone is worth $5.43 billion and deliveries have already begun. In his first press conference after the Ukraine war began, the Ambassador-designate of Russia to India, Denis Alipov, said, “as regards S-400, rest assured it will not be impacted in any way. There is 100% surety on that. As regards overall trade relations and economic cooperation … We have a mechanism and means to doing business bilaterally between our countries in national currencies.”
The relative share of rupee-rouble trade for individual items of two-way trade, however, is not available. India mostly buys petroleum products, diamonds and other precious stones, and fertilisers from Russia while shipping out electrical machinery, pharmaceutical products, organic chemicals and auto parts. Over a half of its imports from Moscow until December this fiscal comprised petroleum products. In 2018, the Russian state-owned miner, Alrosa PJSC, one of the world’s biggest producers of rough diamonds, initiated a rupee-rouble payment mechanism for its Indian clients. This tied in with the request by the then Indian commerce minister for an agreement that does not adversely impact the country’s balance of payments.
Another area where trade in national currencies is relatively high is in services. “Due to the current situation there is a potential for further growth in settlements in the national currencies. Settlement in national currencies already account for tens of per cent of the total volume of trade transactions between Russia and India. These payments are made mostly for services — already half of services’ trade volumes are made in national currencies,” according to the Trade Representation of the Russian Federation in India. For a sense of perspective, bilateral trade in services is pegged at $974 million in 2020, with Russian exports amounting to $753 million, according to the website of India’s embassy in Moscow.
All eyes will be on how the RBI and government firm up a mechanism to ease exporter’s woes, including an appropriate exchange rate for rupee-rouble trade. During the Soviet era, trade favoured India as the rouble was massively overvalued against the US dollar than the rupee was. The rouble is now massively undervalued vis-a-vis the US dollar than the rupee is. As the rupee has appreciated against the rouble, this encourages higher inessential imports by India from Russia and diversion of Indian exports from the world market to Russia according to economist Dr Pronab Sen. Pegging the two currencies is critical to the success of the rupee-rouble agreement if it extends to a restricted list of goods beyond government-to-government deals.
(The writer is an economics and business commentator based in New Delhi. His views are personal)