India and Russia explore rupee-ruble payment system to circumvent war | Business and Economy News

Mumbai, India-Indian authorities are actively considering dedicated payment mechanisms for trade with Russia to enable existing trade obligations following Kremlin sanctions, a move that will also pave the way for cheaper oil imports to meet energy needs. from the country.

Over the past month, as sanctions have been imposed on Russia, the scope of a local currency payment mechanism has shifted from a way to support ongoing trade to opportunities for deeper engagement, including including increased bilateral trade.

For the rupee-ruble mechanism to be implemented, Indian importers would pay for the goods to Russian bank accounts in India and they would in turn make payment in rubles to Russian exporters. But as India’s imports exceed its exports, the only way for Russian banks to get rid of their hoarding rupees is if India exports more, experts say, opening an opportunity for makers of agricultural machinery, medicine, furniture and bathroom accessories, among others. goods, which are looking for new markets.

“We need to know where Russia would like to consider import substitution,” said Nandan Unnikrishnan, a senior researcher at the Observer Research Foundation (ORF). Some of these exports will come from Indian small and medium industries which may also consider setting up units in Russia, he added. “They don’t have a lot of experience with SMEs [Small Medium Enterprises] and we have a huge experience there that we could share practically and on the ground.

Cheap Russian oil

India imports 86% of its oil needs. On Tuesday, India’s crude oil basket was priced at $109 a barrel for its crude imports. While down from $128.24 a barrel earlier in the month, it was still up from $95.47 a barrel the day before the Russian invasion. The sharp rise in oil prices since the start of the Russian invasion will widen India’s gaping current account deficit and push inflation higher, eroding the value of the national currency.

While India receives only 2% from Russia, it can increase these purchases and would have already started to do so given Russia’s offer to sell at a reduced rate and bear the costs of transport and assurance. The prospect of cheaper supplies from Russia would no doubt help New Delhi better manage its finances.

Currently, India’s trade with Russia is largely import oriented – which is why the country maintains a substantial trade deficit. According to Indian government data, the two countries had two-way trade amounting to $8.1 billion in the fiscal year of April 2020 to March 2021, where India’s exports were 2.6 billion while imports from Russia were $5.48 billion.

This bias will persist and could lean more towards imports, especially if it increases its oil purchases from Russia. Unless, of course, India increases its exports.

“The exporting community is certainly looking for opportunities that will arise [along] the way,” said Ajai Sahai, Managing Director and Managing Director of the industry body, the Federation of Indian Export Organizations.

However, he warned, Indian banks are reluctant to support trade with Russia, even for sanctioned goods. To circumvent these issues, the FIEO has submitted a proposal to the Indian Ministry of Commerce suggesting a Rupee-Ruble mechanism as well as a Rupee-based trading mechanism where the contract is concluded in the local currency, Rupee, and the other party support the exchange. interest rate risk.

Lessons from the past

The trade mechanism currently under discussion dates back three decades when India and the then Soviet Union agreed to transact in national currencies at an agreed fixed rate for government-to-government transactions. This was done to circumvent the US dollar as a “vehicle currency” – the currency in which most trade is conducted – during the Cold War.

Now that several Russian banks have been cut off from the international financial messaging system, SWIFT, Russian companies have a much more difficult task to make and receive payments for trade as they are mostly denominated in US dollars.

The Indian government is said to be considering other methods of exchange to ensure that Indian exporters’ claims on blocked sales to Russia are compensated. On Wednesday, Bloomberg News reported that the Indian government is considering a Russian proposal to use a system developed by Russia’s Central Bank for bilateral payments.

In the event that a rupee-ruble mechanism is put in place, analysts believe it is more likely to be at a rate determined by the markets rather than a fixed rate since it will not be for trade between two governments, but for the trade between the companies of the two countries.

“In 1993 and 2003, it was a government-to-government transaction for military purposes or for bilateral loans. There, the rate was completely artificial and it was completely against India,” said Ananth Narayan, associate professor at SP Jain Institute of Management and Research.

“Initially, the ruble was fixed at an artificial rate, then the rate collapsed after the collapse of the Soviet Union, but we always respected the old rate… It was possible to ignore the rates of the market because this was a government-to-government transaction and there were higher stakes, including military cooperation and geopolitical considerations. exporter, why accept an artificial rate?

Upcoming challenges

However, it will not be so easy for India to implement this rupee-ruble mechanism, experts warn.

The biggest stumbling block will be how to decide on an exchange rate against the Russian ruble which has been so volatile since the start of the war. Nor is it viable to peg the ruble and even the rupee to a third currency for trade.

Then, even if the two countries agreed on an exchange rate, the trade deficit would still be largely skewed in favor of Indian imports from Russia, in particular with the increase in oil imports. And it’s only a matter of time before the Indian authorities have to find a way to restore the balance of trade and possibly run into sanctions.

The last and most important concern would be that of geopolitical strategy. India has so far maintained a neutral stance on the Ukraine-Russia war by abstaining from voting three times at the United Nations on resolutions against Russia over its invasion and once on a vote brought by Russia on the humanitarian crisis in Ukraine.

But how far will India be willing to engage with Russia before the United States objects? US President Joe Biden has previously pointed out that of all the countries in the Quadrilateral Security Dialogue – the US, Japan, Australia and India – India has been ‘somewhat fragile’ in showing its support to Ukraine during the Russian invasion.

“At this juncture, it does not appear that the Indian government is for a moment considering abandoning the Russian ship and completely switching to the American ship. I think the Indian government intends to use both equally,” said ORF’s Unnikrishnan.

“Our trade with the West far exceeds what the Russians can get from us. So naturally our industry and financiers will look to Russia as a potential market but will not do anything that will in any way undermine their relationship with the market. Westerner, which is our main source of well-being right now,” he added.

For now, commercial importers and exporters continue to do business with Russia in dollar terms. Experts say the mechanism can be seen as a contingency plan to be triggered if sanctions against Russia were to become tougher. However, at this stage, the risks of actively pursuing deeper bilateral trade with Russia could have geopolitical ramifications for India.

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