Recently, India and Russia decided to halt talks on reviving the Soviet-era rupee-ruble currency exchange mechanism after both sides failed to resolve teething troubles that hindered its successful implementation.
In the wake of Western sanctions and Russia’s suspension from the SWIFT bank messaging network, rupee-ruble trade was pitched as a credible platform that would solve prevailing bottlenecks in cross-border transactions by allowing trade settlement in rupees or rubles. Even as India-Russia energy trade witnessed significant growth, however, the rupee-ruble system could not gain traction as expected. It was marred by four key issues.
First, Western sanctions on Russia deterred the Indian banking system from doing business with Russia. Although India has not supported the West’s Russia sanctions regime, Indian banks are heavily reliant on SWIFT and Western financial infrastructure and seek to avoid potential sanctions. India’s banks thus are cautious about clearing payments with Russia. This has had a negative impact on the rupee-ruble trade as well – Indian banks are reportedly refusing to process payments to Russia through the Special Rupee Vostro accounts set up for the purpose.
Second, the repatriation of funds has been a contentious issue for Russian exporters trading with India. Facing a liquidity crunch at home, Russian businesses prefer receiving a fair share of their export proceeds from India directly instead of investing in Reserve Bank of India (RBI) prescribed low-yield government securities. Having a bilateral trade deficit of $38 billion, India’s foreign exchange reserves are also put under strain when surplus rupee balances are allowed to be converted and remitted back to Russia. While the RBI has generally permitted repatriation in the international rupee settlement mechanism, its implementation vis-à-vis Russia is ambiguous and uncertain.
Third, the Chinese yuan’s growing influence over the Russian ruble, and its potential to spill over to the rupee-ruble trade, had kept India worrying. As part of its newfound strategic relationship with China, Russia has been pushing for the yuan as its go-to currency for settling international trade payments, including those with India. Being China’s territorial and hegemonic adversary, India refused to settle payments in yuan to avoid exposing its volatile currency market to a highly regulated Chinese currency. However, Russia was able to transact in yuan with India on some occasions.
Fourth, the lack of a direct currency exchange rate has rendered invoicing and trade settlement via the rupee-ruble trade difficult. Since the rupee and ruble are partially convertible currencies and have been volatile against the dollar, India and Russia have been wary of pegging a market rate of exchange and have instead turned to double currency conversion: Indian rupees are converted to the dollar and then to the ruble, or vice versa. The drawback is that double conversion of currency not only exposes both countries to exchange rate risks but also makes transactions expensive due to additional handling costs.
Challenges in operationalizing the rupee-ruble mechanism have been a major obstacle for India and Russia to boost bilateral trade. Apart from a few instances where payments from Russia were settled in rupees, Emirati Dirham, and yuan, the dollar is still the currency of resort to settle trade payments between both countries – but not for long. Therefore, there is a need for Russia and India to be creative and “invent something new” to move past transactional risks and promote trade relations.
One option is for India to implement a split-up currency exchange system with Russia similar to its erstwhile rupee-rial trade with Iran, where only 45 percent of oil settlements were paid in rupees and the rest in euros through banks in Turkey. In Russia’s case, India can pay some in rupees and the rest in other preferable currencies such as dirhams via banks in the United Arab Emirates (UAE). By reducing the payment ratio, Russia can be temporarily assured of liquidity and will not be burdened by accumulated rupee balances in its Vostro accounts.
Another option is for India and Russia to explore setting up an independent financial architecture to exclusively facilitate rupee-ruble trade, which could replace the SWIFT messaging system. Local alternatives such as Russia’s SPFS or India’s Structured Financial Messaging System (SFMS) may be studied and put into action. Since SFMS is restricted to domestic transactions within India, Russia’s SPFS network will be a more reliable and feasible option as it has been operational since 2014. That said, Russia may have to establish an exclusive fintech company based in India to allow Indian banks to avail of SPFS technology and avoid potential sanctions.
Finally, India and Russia can also approach the UAE to explore a trilateral rupee settlement mechanism where payments could be settled on a net basis, similar to the Asian Clearing Union. The advantage of the UAE is that it is not only one of India’s largest trade partners but also has recently emerged as Russia’s top trade destination in the Middle East, witnessing a 68 percent growth in trade with Russia in 2022. The UAE is already in talks with India for implementing a rupee settlement for bilateral trade, and the scope for a trilateral partnership will only further mutual goals.