As India touts Rupee-Ruble deal with Russia amid West sanctions, here's how it works

Russian war against Ukraine has now lasted for 37 days with sweeping sanctions on Moscow largely impacting global trade. As the western sanctions delinked Russia from the SWIFT global banking communications system, Moscow remained deprived of access to several international currency markets. This led to the scope of payment mechanisms in local currencies emerging as a viable alternative to increase bilateral trade.

Thus, the Indian government actively considered the Rupee-Ruble mechanism as a contingency plan to carry out business with its strategic partner. The dedicated payment system will enable India to run existing trade obligations with Russia bypassing the crippling penalties imposed by the West and dealing in US dollars. Indicating substantive progress, last week, the Reserve Bank of India (RBI) reportedly met with officials from three Russian financial institutions including VTB, Sberbank, and Gazprombank to discuss the potential Rupee-Ruble deal.

Now, as the agreement is set to come about as soon as next week, as informed by Indian Export Organisations President A Sakthivel, it is pertinent to understand how it will work.

How will the Rupee-Ruble deal work?

Keeping up the India-Russia ties, the explored local currency trade deal would allow respective nations to make payments in their own currency. For instance: Indian importers would pay for their imports in the Russian bank accounts in India, which will, in turn, make the payment in rubles to Russian exporters. At least 5 PSU banks would be selected to engage in trade and such banks will be decided based on deliberations with the RBI governor, finance minister, and other national banks.

The trade mechanism is as old as three decades when India and the Soviet Union agreed to transact in domestic currency at a stipulated rate for a government-to-government transaction. It was a bypass US dollar which was the "vehicle currency" during the Cold war.

Challenges in implementation of the Rupee-Ruble deal

As Russian imports outweigh Indian exports, the only way Russian banks would be able to convert piles of Indian money would be to increase Indian exports, as per experts. Moscow would need to accept imports from medium and small industries that can look at setting up units in Russia as a substitution in order to minimise the export-import gap, said Observer Research Foundation (ORF) fellow Nandan Unnikrishnan. Separately, India could also ramp up its oil purchases from its regular 2%. Although, reports suggest Moscow has already offered India a large stockpile of crude oil at a discount price of about 25% along with bearing the cost of transportation and insurance.

Another stumbling stock for India would be to decide on a fixed rate of exchange against the Russian rouble. Looking at the fluctuating rate of the rouble in the global market, analysts indicated that the value must be determined by markets as opposed to a fixed rate. The suggestion was made keeping an eye on the fact that the deal would be signed between two governments, but for trade between businesses of the two countries.

It is mentioned that currently India's trade with Russia is skewed towards imports leading New Delhi to a substantial trade deficit. Bilateral trade between both countries amounted to $8.1 billion during the financial year 2020-2021. As per government data, Indian exports around the time were at $2.6 billion while imports accounted for $5.4 billion. Experts fear that the difference could increase if India beefs up oil purchases without replacing them with sufficient exports.

US warns India against circumventing western sanctions against Russia

While India is loyal to its historic ties with Russia, New Delhi has to an extent infuriated the US in its attempt to circumvent the sanctions imposed on Russia in the wake of its ongoing invasion of Ukraine. Noting the potential deal, US Secretary of Trade and Commerce Gina Raimondo on Thursday subtly warned India against entering into arrangements with Russia. She asserted that New Delhi's initiative to work out an alternative payment method and buy discounted oil from Russia was "deeply disappointing." However, US State Department spokesperson Ned Price during a presser on Thursday refused to comment on the potential conversion trade deal. "I will refer to our Indian partners when it comes to any such conversion that may have been discussed," he said, as quoted by ANI.

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