Rupee-rouble payment scheme in 2022
Indian authorities are actively looking into trade-specific payment mechanisms with Russia to trigger existing trade obligations following Kremlin sanctions, a move that would also pave the way for cheaper oil imports to meet the country’s energy needs.
As sanctions have been imposed on Russia, the scope of the local currency payment mechanism has shifted from a way to support ongoing trade opportunities for deeper engagement, including increased bilateral trade over the past month.
To make the rupee-rouble mechanism work, Indian importers would pay for things in roubles on Russian bank accounts in India, and Russian banks would pay Russian exporters in roubles. Analysts believe that because imports of India surpass its exports, the only option for Russian banks to get rid of their accumulated rupees is for India to sell more, opening up a new market for agricultural equipment, pharmaceuticals, furniture, and bathroom fixtures, among other things.
“We need to know where Russia is looking for import substitution,” said Nandan Unnikrishnan, a senior fellow at the Observer Research Foundation (ORF). He noted that some of those exports would be coming from India’s small and micro enterprises, which may consider establishing plants in Russia. “They don’t have a lot of Small Business (SME) expertise, but we have a lot of hands-on experience and real-world experience with them.”
86% of India’s oil needs are met by imports. As for crude oil imports, the Indian crude basket was priced at $109 per barrel on Tuesday.
Although down from the dollar 128.24 earlier this month, it’s still up from the dollar 95.47 a day before the Russian invasion. The steep increase in oil prices since the Russian invasion has widened India’s current account deficit and pushed inflation higher, weakening the value of the currency.
While India barely receives 2% of Russian exports, it started increasing its purchases in response to a Russian offer to sell at a discount and cover shipping and insurance costs. Lower-cost Russian supplies would surely aid New Delhi in its financial management.
The commerce of India with Russia is dominated by imports, which explains the country’s large trade deficit. According to official Indian figures, the two nations had $8.1 billion in bilateral trade from April 2020 to March 2021, with $2.6 billion in Indian exports and $5.48 billion in Russian imports.
This bias will persist, and it may even shift further in favour of imports if Russia’s oil purchases increase. Unless, of course, India’s exports increase.
“The exporter community is looking at opportunities that will come along the route,” said Ajai Sahai, director general and chief executive of industry group the Federation of Indian Export Organizations.
However, he warned that Indian banks do not want to support trade with Russia, even for sanctioned goods. To avoid these problems, FIEO has proposed a rupee-rouble method as well as a rupee-based trading mechanism, in which the contract is established in the local currency, the rupee, and the other party bears the exchange rate risk.
Lessons from the past
The existing transaction mechanism dates back to three decades when India and Government-to-government transactions were agreed to by the Soviet Union at the time in indigenous currencies at a pre-determined, set rate. During the Cold War, this was done to avoid using the US dollar as a “vehicle currency,” or the currency in which most trade is conducted.
Now that several Russian banks have been cut off from the international financial messaging system, SWIFT, Russian companies have a much more difficult task of making and receiving payments for commerce because they are primarily in US dollars.
According to reports, the Indian government is contemplating other ways of exchange to ensure that Indian exporters’ receivables against blocked sales to Russia be cleared. The Indian government is contemplating a proposal from Russia to adopt a system designed by the Central Bank of Russia for bilateral payments, according to Bloomberg News.
Analysts believe that if a rupee-rouble system is implemented, it will be at a market-determined rate rather than a fixed rate because it will not be for commerce between two governments but rather for trade between businesses in the two countries.
“That was a government-to-government transaction for military reasons or bilateral loans between 1993 and 2003. This rate is artificial out there, and it’s entirely against India, Ananth Narayan, associate professor at the S P Jain Institute of Management and Research, explained.
Experts warn that India will have a difficult time executing this rupee-rouble agreement.
The most difficult challenge will be deciding on an exchange rate with the Russian rouble, which has been extraordinarily volatile since the war began. It is also not possible to trade the rouble and rupee by pegging them to a third currency.
Even if the two countries agree on a rate of exchange, India’s trade deficit will continue to favour Russian imports, especially as oil imports climb. It’ll only be a matter of time before Indian officials are obliged to find a way to close the trade gap or face sanctions.
The geopolitical policy is the final and most important concern. So far, India has taken a neutral posture in the Ukraine-Russia conflict, abstaining from voting three times at the United Nations on resolutions criticising Russia’s invasion and once on a vote brought forward by Russia on the humanitarian crisis in Ukraine.
But how far will India go to Russia before the US raises objections? The United States President Joe Biden has already stated that of all the countries in the Quadrilateral Security Dialogue — the United States, Japan, Australia, and India — India has been “slightly unsteady” in its support for Ukraine in the wake of the Russian invasion.
“It seems at this stage that the government of India is intending to abandon the Russian ship and switch entirely to the American ship. “ORF’s Unnikrishnan believes the Indian government aims to deploy both equally.
“What we can acquire from the Russians considerably outweighs what we can get from the West.” So, while our financiers and industry will view Russia as a potential market, they will not do anything to risk their relationship with the Western market, which is currently our key source of income,” he added.
Importers and exporters of goods continue to transact with Russia in US dollars for the time being. Experts believe the system might be employed as a backup plan if Russia’s sanctions become more severe. The hazards of actively seeking increased bilateral trade with Russia at this time, however, could have geopolitical implications for India.
Edited by Prakriti Arora