Mumbai, India-Indian authorities are actively considering special payment mechanisms for trade with Russia to meet existing trade obligations following sanctions on the Kremlin, a move that will also pave the way for cheaper oil imports to meet the country’s energy needs.
Over the past month, as sanctions were imposed on Russia, the scope of a payment mechanism in local currencies has broadened from a means of maintaining ongoing trade to opportunities for deeper engagement, including boosting bilateral trade.
For the implementation of the rupee-ruble mechanism, Indian importers would pay goods into the accounts of Russian banks in India, which in turn would make the payment in rubles to Russian exporters. But since India’s imports outweigh its exports, Russian banks could only shed their accumulated rupees if India exported more, experts say. Among other things, this opens up an opportunity for manufacturers of agricultural machinery, medicines, furniture and bathroom fittings for goods that are looking for new markets.
“We need to be clear about where Russia wants to look for import substitution,” said Nandan Unnikrishnan, Distinguished Fellow of the Observer Research Foundation (ORF). Some of those exports will come from India’s medium and small industries, which may also consider setting up units in Russia, he added. “They don’t have much experience with SMEs [Small Medium Enterprises] and we have a lot of experience there that we can share practically and on the ground.”
Cheap Russian oil
India imports 86 percent of its oil needs. On Tuesday, India’s basket of crude oil imports was priced at $109 a barrel. While it was 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 Russian invasion began will widen India’s gaping current account deficit and push up inflation, undermining the value of the national currency.
While India receives a tiny 2 percent from Russia, it can increase these purchases and has reportedly already started doing so, as Russia has offered to sell at a discount and pay for shipping and insurance. 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 based on imports – which is why the country runs a significant trade deficit. According to the Government of India, in the fiscal year April 2020 to March 2021, the two countries had a bilateral trade of US$8.1 billion, with Indian exports accounting for US$2.6 billion and imports from Russia accounting for US$5.48 billion USD.
That bias is here to stay and could gravitate more toward imports, especially if it increases its oil purchases from Russia. Unless, of course, India increases exports.
“The exporter community is definitely looking for opportunities to come [along] the way,” said Ajai Sahai, director general and chief executive of the Federation of Indian Export Organization.
However, he warned Indian banks are reluctant to support trade with Russia, even for goods allowed under the sanctions. To circumvent these issues, FIEO has submitted a proposal to the Indian Ministry of Commerce proposing a rupee-rupee mechanism as well as a rupee-based trading mechanism where the contract is made in the local currency, the rupee, and the other party makes the exchange carries interest rate risk.
lessons from the past
The trading mechanism currently under discussion dates back three decades when India and the then Soviet Union agreed to conduct transactions in the local currencies at an agreed fixed rate for government-to-government transactions. This was done to sidestep the US dollar as the “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 making and receiving payments for trade since they are primarily denominated in US dollars.
The Indian government is reportedly considering alternative exchange methods to ensure Indian exporters’ deadlocked claims from sales to Russia are settled. On Wednesday, Bloomberg News reported that the Indian government is considering a Russian proposal to use a system for bilateral payments developed by the Central Bank of Russia.
In the event that a rupee-ruble mechanism is introduced, analysts believe it will come at a market-determined rate rather than a fixed rate, as this is not for trade between two governments but for trade between Company applies the two countries.
“In 1993 and 2003, this was a government-to-government transaction for military purposes or for bilateral loans. There the course was totally artificial and totally anti-India,” said Ananth Narayan, associate professor at the SP Jain Institute of Management and Research.
“Initially the ruble was fixed at an artificial rate and then the rate collapsed after the Soviet Union collapsed, but we still stuck to the old rate… It was possible to ignore market rates because it is a government transaction was acting with government and there were bigger things at stake, including military cooperation and geopolitical considerations. Why would you agree to an artificial course in a commercial importer and exporter transaction?”
future challenges
However, experts warn that it will not be so easy for India to implement this rupee-ruble mechanism.
The biggest stumbling block will be how to decide on an exchange rate against the Russian ruble, which has been so volatile since the war began. It is also impractical to peg the ruble and rupee to even a third currency for trading.
Then, even if the two countries agree on an exchange rate, the trade deficit will still be heavily biased toward Indian imports from Russia, especially as oil imports surge. And it’s only a matter of time before the Indian authorities have to find a way to return the trade balance and possibly crack down on the sanctions.
The last and most important concern would be geopolitical strategy. So far, India has maintained a neutral stance on the Ukraine-Russia war, abstaining three times on UN resolutions against Russia on its invasion and once on a Russian-sponsored vote on the humanitarian crisis in Ukraine.
But how far will India be willing to cooperate with Russia before the US 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 was “a bit shaky” when it came to helping Ukraine with the Russian invasion.
“As of this writing, it doesn’t look like the Indian government will even consider for a moment giving up the Russia ship and completely switching to the US 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. Of course, our industry and financiers will look at Russia as a potential market, but will not do anything that would in any way shake their relationship with the Western market, which is our main source of wealth at this point,” he added.
For now, trade importers and exporters continue to do business with Russia in dollars. Experts say the mechanism could be seen as a contingency plan that could be triggered should sanctions against Russia tighten. At this point, however, the risks of actively deepening bilateral trade with Russia could have geopolitical implications for India.