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

Moscow became the top supplier of crude oil to India last month, with Russian supplies greater than those from Iraq and Saudi Arabia combined.
as sanctions cut off major Russian banks from much of the West’s payment systems, finding ways to pay for the Russian crude has become a challenge.
For FY 2022-23, following are the India-Russia trade numbers: Indian imports from Russia ≈ $40 billion Indian exports to Russia ≈ $3 billion

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 settlement in rupee is aimed particularly at facilitating trade with sanctions-hit Russia, possibly Iran, and forex-starved Sri Lanka.
Additionally the move was expected to reduce the pressure on India’s forex reserves. Using the rupee for international trade transactions will help check the flow of dollars out of India and slow the depreciation of the currency
Currently, Russia, Sri Lanka, and Mauritius have opened Vostro accounts.

The mechanism for international trade settlements:

Indian importers make payments in ‘rupee’ which will be credited to a Vostro account called Special Vostro Rupee Accounts (SVRAs) (special rupee accounts in Indian banks) of the corresponding bank of the partner country, while Indian exporters will be paid from the balances in the designated Vostro accounts.
Banks from 18 countries have been permitted by the Reserve Bank of India (RBI) to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian rupees