If India and Russia can work out a mutually acceptable exchange rate, bilateral rupee-rouble trade will be beneficial to India.
There is talk that India and Russia May re-start the rupee-rouble trade they had abandoned in 1991. This trade had developed because neither country had much foreign exchange and so both had an interest in conserving dollars.
So payment for Indian exports and imports used to be in rupees. Russia agreed because it wanted to sell arms to India. India needed the arms but didn’t have the dollars to buy from the West. And thus was rupee trade born.
Thirty years on things have changed but not much. Now, along with arms, India also needs oil, both of the fuel type and the edible type. Russia, of course, can’t trade very much because of the sanctions the West has imposed on it.
The old arrangement was given up when the Soviet Union ceased to exist in 1999. The rouble became worthless and the trading had become way too messy and corrupt.
Neither side knew what the actual cost of anything they traded was. Only the middlemen prospered.
The central problem, never solved properly, was the exchange rate. How many rupees should there be to a rouble? Or how many tons of tea were needed to buy one MiG fighter jet?
The Russians dictated the terms with the result that an otherwise useless currency enjoyed a highly beneficial rate. And so great was our dependence on Russian arms that when we finally settled our bills, it was Rs 33 to a rouble! That was 33 times more than the actual value of the Russian currency.
India responded to Russian arm twisting in the 1970s and 1980s by selling lot of rubbish to the Russians. Their middlemen bought it all because the Russian people had no other option than to consume what they had been given, which was very little.
On balance thus, the trade was beneficial to us. We sold a lot of rubbish in return for defence hardware, coal mining equipment and steel and power plants, which by western standards were also rubbish.
Now someone thinks it would be a good idea to revert to that system whereby both sides trade in second and third rate things. And an absolute requirement for this is an artificially determined exchange rate.
But today the Indian economy is bigger and more diversified than the Russian one. Russia has been dependent on western and Chinese industrial goods.
In return it exports things that come out of the ground where the value addition is nil or so. India, meanwhile, can use this opportunity to give a major boost to its Atmanirbhar Bharat programme.
This will complicate things for fixing the exchange rate because the Indian rupee is now way stronger than the Russian rouble. So will Russia agree to a rate that’s 100 roubles to a rupee? Or something higher? I doubt it.
But if it’s forced to do so because of the western sanctions, will it jack up the price of its exports? How much will it sell its gas and oil for? After all, even now no one knows exactly what it costs to produce a barrel of oil or cubic metre of gas or a tank or a MiG or a missile. The Russian defence economy still operates like it used to.
Thus what we will most likely get is a perfectly counterbalanced power. Neither side can rip the other off by huge margins. The rupee will be the stronger currency and the Russian goods will be costly.
Will such a trading arrangement last? That will depend on how quickly Russia is readmitted into the western systems, which could take at least a decade.
So provided India and Russia can work out a mutually acceptable exchange rate, bilateral rupee-rouble trade will be beneficial to India.