Will India and Russia Harness the Power of Rupee-Ruble Trade?

On July 11th, 2022, the Reserve Bank of India (RBI) took a significant step by allowing trade settlements in Indian Rupees (INR) between India and other countries, marking it as an important milestone for facilitating trade with Russia, Iran, and Sri Lanka. This development is more than just a financial move; it signifies a strategic shift in India's approach to international trade. With the current sanctions on Russian oil and other measures imposed on Russian companies, this new arrangement in rupees could potentially shield bilateral trade from such restrictions, providing a path forward for both economies.

Understanding the Current Economic Dynamics

At present, the Indian Rupee (INR) faces the challenge of being at an all-time low. Even with this precarious position, the idea of exchanging rubles for rupees offers a strategic advantage. However, the challenge remains that the Russian Ruble (RUB) is not accepted by the Swift Bank and other countries facing Russian oil sanctions. This limitation complicates the implementation of the new arrangement. By using the INR in trade settlements, both nations can navigate the complexities of international trading environments that are heavily regulated and constrained by sanctions.

Finding a New Path for International Trade

To enable trade settlements in rupees, authorized dealer banks in India will need to establish special Rupee Vostro accounts. The term 'Vostro' is derived from the Latin word 'vostro,' meaning 'yours.' These accounts are a practical solution for facilitating trades where the bank holds funds in the customer’s domestic currency under the customer's name. This step is crucial in supporting the new arrangement and ensuring that trade can proceed smoothly without the need for exchange into foreign currencies.

Implications for Bilateral Trade and Sanctions

While the idea of using rupees in trade settlements can offer a solution to the immediate challenges posed by sanctions, it is unlikely to bring about a significant increase in turnover beyond energy and raw materials. The main issues facing bilateral trade between India and Russia are multifaceted and persistent, including unresolved structural issues such as:

Connectivity and Tariff Barriers: The lack of transport infrastructure and common tariffs create significant logistical challenges. Non-Tariff Barriers: Complex regulations and administrative procedures deter businesses from engaging in trade. Lack of Business Interest: Despite initial interest and enthusiasm, business entities in both countries have had limited interest in deepening trade relations. Excessive Regulations: Existing regulations in both markets can be restrictive and discourage further trade.

India's companies may consider switching to the Russian Ruble (RUB), but this is not without its challenges. The RUB is not fully convertible, limiting its utility in international markets. The introduction of Vostro accounts can mitigate some of these issues, but it is unclear whether this will be a long-term gain or a short-term solution with potential long-term losses.

Historical Context and Future Prospects

India and the Union of Soviet Socialist Republics (USSR) built robust trade relations as far back as 1953. Revisiting these historical ties could provide valuable lessons and insights for the current situation. However, any such revival must be carefully considered to avoid negative repercussions on India's future international relationships. A misstep could lead to a deterioration of India's diplomatic and economic standing with other countries.

Conclusion

In the face of global economic challenges, such as international sanctions and fluctuations in currency value, India and Russia can harness the power of rupee-ruble trade to navigate these complexities. While the new arrangement offers a strategic and practical solution, it is essential to address the underlying structural issues that hinder trade. By balancing the short-term benefits with long-term economic goals, both nations can strengthen their economic ties and ensure sustainable growth.