Rupee-Rouble trade

Rupee-Rouble trade

Subject : Economy

Section : External sector

Concept:

Rupee-Rouble trade, as the name suggests, is a settlement arrangement where a Russian bank keeps enough INR deposits to pay off the Indian exporters to Russia in INR. Correspondingly on the flip side, an Indian bank keeps enough Rouble deposits in Russia to pay for Indian imports. For example-INR-dollar is Rs 77 and Rouble-dollar is 110. Ergo, Russians have to shell out 1.428 (110 by 77) Roubles for every INR.

• This is how the exchange rate between Rouble and rupee is derived indirectly.
• Under this arrangement, a Russian bank will need to open an account in an Indian bank while an Indian bank will open its account in Russia Both sides can then mutually agree to hold currency worth a specified amount in the local currencies in their respective accounts.
• The two nations once embraced rupee payment for Russian export of S-400 Triumf air defence system in 2019 with the deal being for US 5.2 to 5,6 billion to escape sanctions by the US under its Countering America’s Adversaries Through Sanctions Act (CAATSA)

Merits –

• Eliminates dependence on the US$ for bilateral trade.
• Bypass economic sanctions like the blocking the Russian banks from the SWIFT payments network.
• A battered Rouble in the wake of its war with Ukraine works in India’s favor with imports costing less.
• Avoid any delay or default in payments.
• Eliminate supply disruption

Demerits-

• US dollar being the link currency for determining the exchange value of any two currencies with both Rouble and INR not being hard currencies i.e., freely floating in the international currency markets.
• The valuation is actually a key issue for pegging the rouble-rupee exchange rate. All the global currencies are coded against the dollar only. If there is no way to know the dollar -rouble rate, there is no way to know rupee-rouble prices either.
• Not useful in commodity specific trade bans.
• Volatility-The fluctuation in the value of rouble could make it difficult to implement the rupee-rouble payment mechanism.
  • Firstly, it will be difficult to decide a fair exchange rate between the rupee and the rouble.
  • Moreover, if the value of the rouble continues falling sharply, then trading may not happen as the rouble in the Indian bank’s Russian account will lose value.
  • If India helps Russia flout economic sanctions, it may then be accused of siding with Russia and this could hurt New Delhi’s diplomatic relations with the Western power

Alternatives

• Cryptocurrency
• Barter trade
• India’s flagship payments system Unified Payments Interface could also be potentially linked to Russia’s own System for Transfer of Financial Messages.
• Stable peg to rupee-rouble