India and Russia are in talks to see how the rupee-ruble trade deal can be revived. The sanctioned country wants to circumvent restrictions imposed on it after President Vladimir Putin’s war with Ukraine to regulate trade, bypassing the dollar, euro and other Western currencies. Russian Foreign Minister Sergei Lavrov, who is in Delhi to discuss details of the operation, said the country plans to increase the use of non-Western currencies for trade.

India is one of the countries taking a neutral stance on the war, while calling for a diplomatic resolution, and is – rightly – open to accommodation for three reasons. First, there is no reason to upset Russia, India’s largest supplier of defense equipment. Second, China and Russia already have a yuan-ruble trade deal in place since 2019. Western countries are simply unlikely to risk extending sanctions to two of the world’s largest economies for using their national currencies to trade with Russia.

Third, Indian exporters who have around $500 million in debt blocked as a result of Western sanctions barring Russia from SWIFT could use a rupee-ruble trade settlement deal to get their due.

Indian exporters see Russia’s impending isolation from global finance and trade as an opportunity to tap into new markets. The Federation of Indian Export Organizations (FIEO) has expressed interest in a ruble-ruble window to boost trade with Russia. Non-defense trade with Russia accounted for less than 2% of India’s total trade basket in FY21. Indian exports to Russia were $2.62 billion while imports were $5. $82 billion.

Russia could spend the rupees in its trade account selling crude oil and defense supplies to India to buy more and more goods and services from India. FIEO has highlighted the untapped opportunity for Indian small businesses in the pharmaceutical, agricultural and chemical sectors.

How will such an arrangement work? Indian exporters will be paid in rupees instead of dollars or euros. To facilitate this, designated Indian banks will open accounts in Russian banks and vice versa. Rupees will be deposited in Russian banks and converted into rubles and vice versa for Indian banks.

Lavrov said more and more trade will be done through the Financial Message Transfer System (SPFS) developed by the Russian central bank as an alternative to SWIFT. But bilateral rupee-ruble payments may not be possible immediately on the tiny platform which has just 23 connected banks, compared to 11,000 on SWIFT. In fact, no Indian bank is there yet.

Russian banks VTB and Sberbank already have operations in India and can potentially be used as conduits for rupee-ruble transactions. To facilitate circumvention of the sanctions regime, a few smaller Indian banks, with less global footprint – in terms of branches and relationships with foreign entities in the West – may be pre-selected to facilitate rupee-ruble trade.

A minor point being negotiated is the level of exchange rate to be used: should settlements be made at a pre-determined fixed rate or at the market rate or at a floating rate within a band? The ruble has been volatile; It depreciated sharply to historic lows after the imposition of the sanctions and is correcting just as quickly. The central banks of the two countries may consult together to work out mutually acceptable details of the exchange rate.

In fact, both parties are used to using a rupee-ruble trade agreement. Transactions primarily for India’s military purchases were made through it in the 1990s when local currency trading was necessitated by the two countries holding limited foreign exchange reserves. India was dependent on Russia for most of its defense purchases and settled for an exchange rate that completely favored the Russians, which is unlikely this time around.

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