*With RBI allowing trade settlement in Re, India, Russia can set up banking structure – The Hindu BusinessLine

lipped from: https://www.thehindubusinessline.com/economy/rbi-framework-in-place-india-russia-to-speed-up-banking-arrangement-for-rupee-denominated-trade/article65631845.ece

Discussion on a payment system to circumvent Western sanctions against Russian banks was initiated during Russian Foreign Minister’s visit in April, say sources

In a move that is likely to give further boost to India-Russia bilateral trade, the government is now set to formally work on allowing Russian banks, not under Western sanctions, to open accounts in the country. This follows the RBI’s decision on Monday to allow trade settlement between India and other nations in rupees.

“Now that the mechanism for doing transactions in rupee has been approved, India and Russia can put in place the banking framework required to carry out rupee-denominated trade that will allow it to steer clear of banking sanctions imposed by the West on Moscow. Moreover, since the transaction will happen only in rupee, there won’t be any foreign exchange loss for India,” an official tracking the development said.

Vostro accounts

Under the mechanism, non-sanctioned Russian banks, such as Gazprom, could be allowed to open vostro accounts in participating Indian banks, for instance UCO, SBI or Bank of Maharashtra. When Indian importers buys oil or any other item from Russia, they will make payments in rupee while will be credited to these special vostro accounts of the Russian banks.

Indian exporters of goods to Russia will then be paid in rupee from the balances in the vostro accounts.

Although, Russia has a huge trade surplus with India, under the RBI rules, the rupee surplus balance may be used for permissible capital and current account transactions in accordance with mutual agreement. “Trading partners holding surplus rupee balance may use it for investments as per given rules. So, even if Russia cannot import enough from India to have a zero balance, the surplus could be used for investments in the country,” the official explained.

India’s bilateral trade with Russia in 2021-22 was $ 13 billion of which India imported goods worth $9.8 billion and exported items valued at $3.2 billion, according to Indian government data.

 Post-sanctions developments

Following Russia’s invasion of Ukraine on February 24, seven Russian banks were banned from using the SWIFT messaging system that effectively stopped them from participating in international trade. The multiple sanctions targeting Russian oligarchs, a number of major Russian banks and several state entities and their subsidiaries, led to fear amongst Indian companies doing business with both Russia and the West of secondary sanctions that may be aimed at them, the source added.

Although the West’s sanctions against Russia do not include oil at the moment, New Delhi has been facing heavy criticism globally for increasing its oil imports from the country after Moscow waged war on Ukraine. Russian oil imports account for 10 per cent of India’s crude import basket in April 2022, up from 0.2 per cent prior to the Ukraine war, according to industry figures.

“The RBI, by allowing invoicing and payments for international trade in rupees, has now created a framework that will enable India and Russia to carry out rupee-denominated trade and this will take care of all fears associated with exposure to the Western payment system. Once the rupee trading arrangement is in place, India and Russia can continue trading in oil and other products without apprehensions,” the source said. 

Both India and Russia have been discussing the rupee-denominated trade mechanism since Russian Foreign Minister Sergey Lavrov’s visit to New Delhi on March 31-April 1 this year and the proposal had initially been floated by the Russian side to circumvent the sanctions, the source added.

Published on July 12, 2022

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