May 6, 2023
Russia has stockpiled billions of rupees in Indian banks that it cannot use, according to Russian Foreign Minister Sergei Lavrov on Friday, which points to a growing trade imbalance with India.
“This is a problem,” Lavrov told reporters on the sidelines of the Shanghai Cooperation Organisation conference in Goa. “We have to put this money to good use.” However, these rupees must be converted into another currency, which is now being debated.”
Russia is not too keen on accepting rupees because of fluctuations in the exchange rate, while India is reluctant to complete the trade for fear that it would not be able to buy ample Russian roubles at a fair price in the open market. One solution that was proposed was to carry out transactions through euros and dirhams, which are used to pay for Russian crude imports at a discount by India, but that could make the country susceptible to closer US sanctions scrutiny.
According to figures from the Ministry of Commerce and Industry, India’s overall exports to Russia fell 11.6% to $2.8 billion in the first 11 months of the fiscal year 2022-’23, while imports climbed five-fold to $41.56 billion. This rise occurred as Indian refiners snatched up inexpensive Russian oil that the West had boycotted in response to President Vladimir Putin’s invasion of Ukraine. According to Vortexa Ltd, a data analytics organization, India’s imports of Russian crude, meanwhile, reached a record 1.68 million barrels/day in April, a six-fold increase over that in the previous year.
Following sanctions against Russian banks and a block on transactions using the SWIFT messaging system, the Kremlin, initially, prevailed upon India to trade in national currencies. Both countries agreed to carry out transactions through a rupee-rouble arrangement, after experimenting with the euro, as well. But this resulted in a huge accumulation of Indian rupees in Russia’s banks given the large volume of payments and both countries debated ways to increase Russian sourcing from India.
The Indian government had suggested that Moscow invest the rupees from arms sales in the Indian debt and capital markets to avoid hoarding of the rupees, but this did not appeal to the Russian government.
However, due to the rouble’s instability shortly after the Russia-Ukraine conflict began, plans for the rupee-rouble arrangement for oil imports were abandoned. Since the invasion of Ukraine, India has resisted US provocations to cut ties with Moscow.
Tens of Billions of $
Alexander Knobel, head of the Institute of International Economics and Finance at the Ministry of Economic Development, said that, because of Russia’s trade imbalance, the amount of “frozen funds” could reach tens of billions of dollars. “The situation is further complicated by India’s historically high trade deficit, which makes it more difficult to strike deals with other nations.”
India’s biggest supplier of arms and military equipment is Russia. However, defence supplies to India have stopped because India does not have a way to pay that does not act against the US sanctions. For almost a whole year, India has been unable to pay for weapons worth more than $2 billion. This is because New Delhi does not want to pay in dollars for fear of getting attracting to itself secondary sanctions and Russia, on its part, does not want to accept rupees.
Indian oil refiners have been trying to pay for cheap crude oil with dirhams, roubles and rupees from the United Arab Emirates. International rules do not apply to trades that cost less than $60 per barrel, which is the price cap set by the Group of Seven (G7) and the European Union.
To enable offshore trading in rupees and keep crude flowing, Indian lenders opened special vostro accounts with Russian banks, such as Sberbank PJSC and VTB Bank PJSC. Bank of Russia governor Elvira Nabiullina said on April 28 that currency restrictions make it hard for Russian traders to get their rupees back.