Currency conundrum: India, Russia Grapple with Challenges In Rupee-Ruble Trade

The massive pileup of rupees deposited as payments for crude oil that sanctions-hit Russia exports to India and Moscow’s inability to spend the money have jolted officials of both countries to work overtime in a bid to tide over the currency conundrum.

The growing currency stash indicates Russia is selling much more to India than it is buying, creating an imbalance in trade between the two countries.

At a time when the West began shunning Russian energy in a bid to punish Moscow for waging the ongoing Ukraine war, New Delhi, along with Beijing, had stepped in to lap up all the excess oil that was being offered at a massive discount. 

As it came under heavy economic sanctions and was shunted out of the SWIFT network – a global payments system that is primarily controlled by the US and Europe – Russia ditched the dollar and began accepting payments for oil exported to India in rupees.

Over the past year, as India’s crude oil imports from Russia have been surging, Moscow is increasingly finding itself accumulating billions of rupees that it cannot readily spend. 

Indian government data show the trade deficit with Russia jumped sevenfold to $34.79 billion in January from $4.86 billion in April last year. In contrast, Russia has a trade deficit with China.

The growing crude oil imports has catapulted Russia to the second spot on India’s trading chart, next only to China.

This concern was raised by Russian deputy Prime Minister Denis Manturov when he landed in India in April. 

“Indo-Russia trade is booming, but payments are an issue. Imports from India are not enough to use the rupees,” Manturov said, while advocating a free trade pact between New Delhi and the Russia-led Eurasian Economic Union (EAEU) that also comprises Belarus, Kazakhstan, Kyrgyzstan, and Armenia.

Earlier this month, Russian foreign minister Sergey Lavrov said Moscow holds “billions of rupees in accounts in Indian banks” and seeks to convert them to either yuan or another currency. 

“As for the rupee, this is a problem, because we have accumulated billions of rupees in accounts in Indian banks, and we need to use this money. But to use it, these rupees need to be transferred into another currency, and this is being discussed now,” Lavrov said on the sidelines of the Shanghai Cooperation Organisation (SCO) foreign ministers’ meeting in Goa. 

As India and Russia strive to address this challenge, there are many roadblocks along the way.

To begin with, India’s commerce ministry has asked export bodies to zero in on areas where India can ramp up exports to Russia. But analysts that Press Insider spoke to said this is not enough and that both countries must explore alternative payment mechanisms. 

P Thangappan, secretary-general of the Indo-Russian Chamber of Commerce and Industries, said financial institutions in both countries should agree on a way for Russian businesses to use rupees deposited in their Vostro accounts with Indian banks.

A Vostro account is a type of bank account that one bank holds on behalf of another bank from a different country, enabling them to conduct trade smoothly by facilitating payments for purchases.

The Reserve Bank of India had, in July 2022, announced a mechanism to settle international trade in rupees and had allowed banks from 18 countries to open Vostro accounts, Union minister of state for finance Bhagwat Kishanrao Karad told Parliament in March.

Meanwhile, trade bodies in New Delhi and Moscow are also exploring ways to correct the imbalance. 

In April, a delegation led by the Federation of Indian Export Organisations (FIEO) visited Russia to explore the prospects of boosting exports of food and processed food products from the current $750 million to $3 billion in three years. 

Demand for agricultural products, food and processed food products, and automobile parts is robust in India. “But the only problem is payment settlement, which remains the major impediment and needs critical resolution,” said Niranjan Marjani, an independent foreign policy analyst and researcher.

“The Russian foreign minister stated that they don’t know what to do with all those rupees in their account. But India had suggested that the Russians could invest in Indian bonds and securities,” Marjani said.

A steadily dwindling arms trade between the two countries is not helping the cause either. India reduced its arms imports from Russia to 45% in 2018-22 from 64% in 2013-17, data released by the Stockholm International Peace Research Institute (SIPRI), a Swedish think tank, showed. 

Russia is also caught up with the war, and “considering the pressure on its defense industry and production capabilities, there are questions if Moscow can supply arms promptly,” Marjani said.

Defense cooperation with Russia has been a cornerstone of Indo-Russian relations, Marjani said, adding that India’s reduced arms imports from Russia will not have any bearing on bilateral ties, although the recent top official’s comments on the inability to accept trade settlement in Indian rupees suggest otherwise.

Queries sent to spokespeople in the Russian embassy and the Indian commerce ministry did not elicit a response.

Anil Trigunayat, India’s former ambassador to Jordan, Libya, and Malta, told Press Insider that India and Russia need to devise innovative mechanisms to resolve the issue.

“Russia could consider using the accumulated rupees in the Vostro accounts for trade as 16-17 countries already trade in the Indian rupee,” Trigunayat said.

Meanwhile, amid mounting calls for alternatives to the dollar in global trade, the BRICS nations – comprising Brazil, Russia, India, China, and South Africa – may explore the possibility of rolling out a common currency at their next heads of state meeting in Johannesburg in August.