Trade in Indian rupee with Russia shows hiccups in ‘de-dollarisation’ concept

Vibha Sharma

Chandigarh, July 8

Around last month the economic wing of the RSS, the Swadeshi Jagaran Manch, made certain suggestions to the Narendra Modi government to “further the objective of using the Indian rupee as a trade currency”.

Congratulating the government for the “historic step of approving trade settlement in rupees”, the BJP’s ideological fountainhead said that more countries should be encouraged to use the rupee as a trade currency. “India can do this by signing bilateral agreements with other countries that would allow for rupee-denominated trade,” it suggested.

India-Russia oil trade and internationalisation of rupee

US and European sanctions and oil price caps imposed in the wake of the Ukraine-Russia war affected world trade patterns majorly. Taking advantage of discounts amid the conflict, India increased oil imports from Russia paying for purchases in its own currencythe rupee. Sanctions meant that Russia could no longer do business in dollarthe currency used for trade payments across the world.

The RBI in July 2022 allowed settlement for import and export of goods and services in rupee, signaling a new change with India aiming to internationalise its currency like other major economies.Sanctions against Russia meant it was no longer a part of the dollar-dominated world trade and financial system and forIndia it was an appropriate time to push for rupee.

“The internationalisation of a currency is also closely interlinked with the nation’s economic progress, especially its prominence in global trade”, a recent RBI working group stated. The group also recommended enabling rupee as an additional settlement currency in multilateral mechanisms such as the Asian Clearing Union, according to reports quoting the RBI report.

Payment in Chinese yuan

While India tried to push the rupee, reports now suggest that some Indian refiners have been paying for oil imports in yuan. “Indian refiners, including a private refiner, have paid for some oil imports in yuan following demands from Russian suppliers”, according to agency reports, suggesting that India was making about 10 per cent of payments in yuan and the rest in rupee and UAE dirham.

Given the tensions between India and China, the report came as a surprise to many.

India, China among largest buyers of Russian oil

Russia has overtaken Saudi Arabia to become China’s top crude supplier, according to reports.

Increase in trade with China also meant that yuan has now become a key part of the Russian financial system. While India has been trying for its currency, experts say the trade deficit between Russia and India is too big for rupee to be of any major use to Russia.

The fact is, unlike India, China has a robust trade (import and export both) relations with Russia. Along with imports, Chinese exports to Russia also increased many fold, say experts, meaning that while Russia can use yuan to make payment to China for the goods itbuys, the scope for rupee is somewhat limited.

India had been paying for oil purchases in rupee and dirham, the currency of the United Arab Emirates, which too is tied to the US dollars. Reports suggest that Russian suppliers have told Indian oil marketing companies to make some payment in a currency they can use immediately as a result of which “10 per cent payment is being made in yuan.”

RBI and Indian rupee

In the wake of the Ukraine and Russia war and US sanctions on the use of dollars for payments to Russia and Iran, the RBI in July 2022 allowed settlement for import and export of goods and services in rupee.

Another reason was to support the weakening rupee by promoting Indian exports and boost foreign trade. Many countries interested in importing from India and not able to do so due to paucity of dollars can pay in INR, officials said.

To facilitate settlement in rupee, Indian banks also opened ‘Special Vostro Rupee Accounts’ with several countries.

So far, 18 countries have opened SVRAs to settle trade in rupee, according to reports. They include Malaysia, Mauritius, Myanmar, United Kingdom, Russia, New Zealand, Sri Lanka, Oman, Seychelles, Singapore, Tanzania, Uganda, Botswana, Fiji, Germany, Guyana, Israel, and Kenya.

India for the first time made payment to Russia in December 2022 for import of crude oil in rupee.

Problem in trade in rupee between India and Russia

One of the main issues in trade in rupee with Russia is the high trade gap againstIndia.

While India’s exports to Russia were recorded at $2.8 billion in the first 11 months of the 2022-23 FY, imports remained much higher at $41.56 billion. A major part of imports was on the back of the Russian crude.

“Imbalance in trade meant ‘frozen funds’ for Russia, leading to rupee surplus in billions of dollars which was not desirable. India’s share of global exports is around 2 per cent, thereby reducing the necessity for countries to hold rupees. The Indian currency is also not fully convertible”, experts say.

The bottom line is that for the rupee to bestrengthened and internationalised, India needs to increase exports.

The fact that Russia had accumulated “billions of rupees in Indian banks it cannot use” was also highlighted by Foreign Minister Sergei Lavrov during his visit to India earlier this year. “This is a problem…we need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now,” he was quoted as saying.

Experts say a good beginning has been made but it requires more work tomake the rupee a power to reckonwith. “The fact is international trade transactions between countries are based on many factors, including geopolitical and economic situation and relationships, the availability of goods, exports, their quality and price and exchange rates,” they add.