The Russia-Ukraine War has led to many Russian banks banned from the The Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system.
SWIFT is a global payment gateway used for all financial transactions and settlements. SWIFT allows secure and quick communication among global lenders for cross-border payments. However, seven Russian banks have been now excluded from the messaging system.
With Russia being India's largest defence partner, including other imports, the Indian government is looking for ways to make sure the money continues to flow to facilitate the trade.
Indian traders have naturally raised concerns, as Russia's exports to India stood at $6.9 billion in 2021, mainly mineral oils, fertilisers and rough diamonds, while India exported $3.33 billion worth of goods to Russia in 2021, mainly pharmaceutical products, tea and coffee.
The government is reportedly considering such a mechanism in order to deal with the effect of international sanctions on Russia over its invasion of Ukraine. The United States, European Union, United Kingdom and Canada, among other major countries, have announced sanctions till now. Some of these measures target Russian state-owned banks and restrict the country’s ability to carry out transactions in major currencies.
In the past as well, India has used alternative payment options with Russia on account of sanctions being imposed on Moscow.
In August 2019, a senior Russian official had said that India would pay Moscow for the S-400 Triumf air defence missile system in rupees.
The delivery of the missile system is slated to begin in 2023. “The mode of payment will be in Indian currency,” Yaroslav Tarasyuk, Trade Representative of Russia in India, had said when Russia confirmed the delivery.
What is Rupee-Rouble trade?
Rupee-Rouble trade is a payment mechanism that can allow Indian exporters to be paid in Indian rupees for their exports to Russia instead of standard international currencies such as dollars or euros.
Under this arrangement, a Russian bank will need to open an account with an Indian bank while an Indian bank will open its account in Russia.
Both sides can then mutually agree to hold currency worth a specified amount in the local currencies in their respective accounts.
If the specified amount is say, $100 million, then the Russian bank’s account in India will have rupees of the same, while the Indian bank’s account in Russia will have roubles worth that amount.
There has to be a notional value of equivalence, say in euro or dollar, to which the value of the rupee and rouble will be pegged and the exchange value has to be mutually decided.
Once the payment mechanism is in place, the Indian exporter can be paid in rupee from the Russian bank’s account in India and imports from Russia can be paid for with roubles from the Indian bank’s account in Russia.
Why global trade is done through Dollars
A global currency is one that is accepted for trade throughout the world. Some of the world's currencies are accepted for most international transactions. The most popular are the U.S. dollar, the euro, and the yen. Another name for a global currency is the reserve currency.
The dollar became the reserve currency at the 1944 Bretton Woods agreement kickstarted the dollar into its current position. Before then, most countries were on the gold standard. Their governments promised to redeem their currencies for their value in gold upon demand.
The Rupee-Rouble arrangement is not new
India has attempted the Rupee-Rouble payment mechanism with Russia on a very small scale earlier for a few items like tea. But it has happened in normal times and never on a large commercial scale.
It was in 2014 that India and Russia agreed to make payments through the Rupee-Rouble trade after India faced a US sanctions threat over a defence deal with Russia.
But, there’s a problem.
A Rupee-Rial payment mechanism, however, had successfully worked in India’s trade with Iran when economic sanctions were imposed on the country by a number of Western nations in 2012.
India successfully used the mechanism for partly paying for its oil purchase from Iran. This worked well for several years till the Trump regime placed product-specific sanctions on the oil trade with Iran and India stopped its purchases from the country.
How critical is the Rupee-Rouble mechanism for India?
It is important for India to have an alternative payment mechanism in place with Russia as the US, the EU and the UK have blocked at least seven Russian banks from accessing SWIFT, a global secure interbank system that communicates payment instructions and enables transactions between banks from all the countries around the world.
An estimated $500 million is pending for goods already shipped by Indian exporters and it is now not possible to get the payment through the regular SWIFT channel.
Since transactions with Russia cannot be carried out in international currencies such as the dollar or the euro, a rupee payment mechanism could play a pivotal role in deciding whether Indian exporters will get their payments and if trading can be continued with Russia.
Will the agreement work?
The Rouble is not fully convertible, so not easily traded in forex markets with little-to-no restrictions. This results in low trade volumes for the currency pair, currency analysts said.
Since from the war, the rouble has plunged to its record low against the US dollar. Currently, the Russian rouble is cheaper than the rupee. It means India needs to pay less for its imports from Russia.
India has to be very careful before taking a final decision on the proposed rupee-rouble payment arrangement. Much would depend on the final shape the Western economic sanctions against Russia would take.
At present, there is only a sanction against the use of SWIFT. There is nothing to bar India from trading with Russia using alternatives such as a barter system or a rupee-rouble payment mechanism.
However, if the sanctions turn product-specific, then it may be difficult for India to use this arrangement. The US and the EU are already unhappy with India for abstaining at the UN Security Council and the UN Human Rights Commission on all resolutions that criticise Russia for invading Ukraine.
On top of that, if India helps Russia flout economic sanctions, it may then be accused of siding with Russia and this could hurt New Delhi’s diplomatic relations with the Western powers.