Russia’s Rupee Problem
- June 12, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Russia’s Rupee Problem
Subject: economy
Section: External Sector
- Russia has over $2 billion worth of Rupee reserves earned from India’s payments mainly for defence imports. With the Ukraine war Russia has been under sanctions, and so finds it difficult to take out the money.
- With none of the ways of using the Rupee reserves or taking it out of India working, Russia has no option other than investing in government securities and infrastructure and other projects in India.
Some options that have not worked out:
- Using the money to buy imports from India: Russia finds the quality of Indian exports inadequate, so the solution of a balanced trade is not feasible.
- Dirham route: This route is blocked because of increased Western scrutiny of UAE banks following the Financial Action Task Force (FATF)’s ‘grey-listing’
- Iran-India-Moscow triangular payment arrangement: Russia recently proposed that Iran’s imports from India could be paid using the Rupee reserves, and then Iran and Russia could balance their accounts separately.
- India has rejected the offer citing diplomatic difficulties (Allegations that Iranian drones are being used by Russia against Ukraine)
The solution:
- SHORT TERM:
- To invest in government securities, infrastructure and other projects in India.
- MEDIUM TERM:
- Russian companies could set up operations in India and produce items as per their quality specifications.
- Joint ventures that produce goods that are of use to Russia or could be exported to other parts of the world
Why situation is concerning for Russia:
- The Rupee reserves are growing fast, and they are not able to utilize the money.
- At present India pays for oil in hard currencies (USD, Pound, Euro etc) because the price was below the price cap fixed by Western nations. If this changes (paying for oil in Rupee) the problem will become even more severe.
Why the situation is critical for India:
- The problem poses as a setback to efforts of internationalization of Rupee.
- ‘International Settlement of Trade in Indian Rupee’ mechanism was initiated by the RBI in 2022.
- May hurt trade and diplomatic ties with Russia that has been a long term strategic defense partner.
INDIA-RUSSIA TRADE
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Internationalisation of Rupee Internationalisation of Rupee means that the rupee can be freely transacted by both resident and non-residents, and can be used as a reserve currency for global trade. It involves promoting the rupee for import and export trade, and then other current account transactions followed by its use in capital account transactions.
The mechanism for international trade settlements:
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