India is exploring a rupee-rouble trade mechanism with Russia to circumvent the sanctions on Moscow by the US and its allies. What are the options and how feasible will they be in the long run?
Earlier in March, Business Standard had reported that the government was looking at allowing India-Russia trade in local currencies. Initially, this would apply to sectors such as agriculture, pharmaceuticals and energy, where sanctions had not been imposed by the US and its allies. The understanding was that a similar call regarding trade in defence equipment and dual-use items would require extensive deliberations. Cut to the present, there has been progress in enabling India-Russia trade in local currencies. Last week, the Reserve Bank of India reportedly met with officials from three Russian financial institutions to discuss possible payment mechanisms that would enable trade between the two countries. The Russian institutions involved were VTB, Sberbank and Gazprombank. According to a financial daily, one of the options is a rupee-ruble trade mechanism. The idea calls for deeper engagement by Russian banks that have a presence in India in order to facilitate the trade. A banker told the financial daily that under such an arrangement, there might be no need for an Indian bank to play a nodal role, as UCO Bank did for trade between India and Iran after the US had imposed sanctions on the latter. So, how close are we to operationalising this mechanism? Federation of Indian Export Organisations President A Sakthivel told a news channel that the rupee-ruble trade mechanism could come as early as this week. But, there are multiple challenges involved. There might be a solution for the Russian banks participating in such a trade.
An official from an overseas bank told a financial daily that Chinese banks in India could be tapped for this. How would this work? The Russian bank would swap the rupees for renminbi from a Chinese bank branch in India. Unlike rupees, renminbi can be used by Russians. Meanwhile, the Chinese bank can use the rupees to buy dollars, as it does not face any sanctions. However, fluctuations in the ruble’s value could make things difficult when it comes to deciding the exchange rates. But, why do we need such a mechanism in the first place? At the beginning of March, it was reported that Indian exporters were sceptical that payments worth about 400 million dollars might get stuck as certain Russian banks were blocked from accessing SWIFT. Exporters had found that many buyers did not have the ability to make payments in any foreign currency or from a third party or country. However, they showed a willingness to make payments in rubles. Also, as India’s export to Russia is not considerable, there is an opportunity for Indian companies to enter the country while the West exits. During April 2020-March 2021, according to Russian figures, bilateral trade amounted to 9.31 billion dollars. Out of this, Indian exports amounted to 3.48 billion dollars and imports amounted to 5.83 billion dollars. Business Standard has also reported that India might import close to 2 million tonnes, or about 15 million barrels, of crude oil from Russia in 2022. The aim would be to take advantage of Moscow’s offer to sell its crude oil cheap and bear insurance and transportation costs. The transactions involved are likely to be in rupee or ruble terms. In the end, whatever mechanism India settles on, it will have to tread carefully given the geopolitical stakes involved.