Today’s world has been facing the war of the grand designers, or the elites, where the parties are acquisitively related to each other’s various domains. The ongoing war in Ukraine has emerged as a prominent development in contemporary global affairs. The war that was initially characterized by the use of firearms has evolved into a multifaceted issue, encompassing widespread food shortages, famines, energy shortages, and socio-economic obstacles on a global scale. Unprecedented economic sanctions have been implemented by the Western world in response to the severity of Russian bullets’ brutality. Nevertheless, there remains a prospect of altering the situation that transpired in the preceding year.
The settlement of trade between the rouble and rupee is a significant consequence of the war and economic crisis. Historically, India and the Soviet Union engaged in significant cooperation during the Cold War period. From the 1970s until 1992, the Reserve Bank of India implemented a rupee-rouble exchange programme. Although the current exchange programme holds greater significance compared to its predecessor, in the past year, the volume of trade between India and Russia has reached an unprecedented level. The bilateral trade volume between India and Russia during the period of April 2022 to February 2023 has attained a value of $45 billion and is expected to exhibit further growth. India and Russia have expressed their intention to increase their bilateral trade to $30 billion by 2025, as per the official statistics of India. This is a significant rise from the $8 billion recorded during the 2021 financial year.
The rupee trade settlement and suspension
The Reserve Bank of India has engaged in preliminary discussions regarding a potential trade agreement between the Indian rupee and the Russian ruble. This arrangement would facilitate the continuation of exports to Russia, which have been impeded by the imposition of international payment restrictions resulting from Western sanctions. The negotiations, aimed at enabling India to sustain its procurement of Russian energy exports and other commodities, may potentially provoke the displeasure of Washington and its associates in light of their efforts to impose sanctions on Moscow for its military intervention in Ukraine.
However, India has a trade deficit with Russia, from which it buys energy, fertilisers, and jewels, while Indian exports to Russia are largely pharmaceuticals. As a result, efforts to resolve trade transactions in rupees between India and Russia have been suspended due to apprehensions regarding an excess of rupees.
What was the reason for the stoppage of the settlement?
The attempts made by India and Russia to resolve the matter of bilateral trade in rupees have been put on hold. This decision comes after several months of negotiations that proved unsuccessful in persuading Moscow to retain rupees in its reserves. The absence of a permanent rupee payment mechanism poses a considerable challenge for Indian importers of low-cost oil and coal from Russia, as they were anticipating its implementation to mitigate the expenses associated with currency conversion.
On the other hand, Moscow holds the belief that a mechanism resulting in a high trade gap in their favour would lead to an annual surplus of over $40 billion in rupees. Additionally, Moscow does not view the accumulation of rupees as desirable.
Moreover, India’s contribution to the worldwide export of goods stands at a mere 2%, and the rupee’s non-convertibility status diminishes the incentive for foreign nations to retain rupees. As per a government official from India, there has been a significant increase in India’s imports from Russia, amounting to $51.3 billion until April 5, subsequent to Russia’s invasion of Ukraine in February of the previous year. This is in contrast to the imports worth $10.6 billion during the same period in the preceding year. The import of discounted oil has been a significant component of India’s imports, experiencing a twelvefold increase during the period. According to the official, there was a slight decrease in exports from India during the same period, with a decline from $3.61 billion in the previous year to $3.43 billion.
Moreover, the discontinuation of efforts to establish a means of trade settlement in rupees between India and Russia represents a significant hindrance for Indian importers who rely on cost-effective oil and coal. The decision comes after months of negotiations failed to convince Moscow to keep rupees in its coffers, with Russia fearing accumulating a rupee surplus of over $40 billion annually and not feeling comfortable holding the currency. Despite the suspension of negotiations, trade with Russia has continued despite sanctions and payment issues.
Outcomes of the decision
Despite the decision of both actors to suspend the settlement, the likelihood of resuming the process remains significant. Hence, in order to resolve the matter at hand, the adoption of a tertiary currency or the creation of an entirely novel currency presents a prudent alternative for all parties involved. The Russian Foreign Minister has underscored the matter, stating that the trade between India and Russia in rupees poses a challenge and necessitates a conversion to an alternative currency.
Conversely, the actors in question are constituents of the BRICS alliance, thereby presenting a novel prospect for the adoption of an alternative currency in the context of trade between India and Russia, as well as among the other BRICS nations. Furthermore, considering the extensive and substantial trade relations among the BRICS nations, the resolution holds significance. Nevertheless, the rupee trade is halted sometimes, but that doesn’t mean that it will stop forever; rather, the chances of using a new currency among these actors are more viable in the future.
Notwithstanding the suspension of negotiations, commerce with Russia has persisted in the face of economic sanctions and payment challenges. At present, Indian traders are engaging in the settlement of certain trade payments beyond the borders of Russia and resorting to the involvement of third-party entities for the purpose of trade settlement with Russia. The prohibition against conducting transactions with foreign nations through SWIFT is non-existent.
Therefore, payments are being directed to a third country, which subsequently channels or counterbalances them for their commercial transactions with Russia. Moreover, some payments are being directed through China as well, which ignites the possibilities of using a common currency.
In summary, the geopolitical conflict in Ukraine and the dominant position of the US dollar have contributed to an ambiguous global economic perspective over the past year. The devaluation of currencies in major economies and the imposition of Western sanctions on Russia have resulted in a shortage of resources in the energy sector. In order to address these issues, India and Russia have opted to engage in bilateral trade using their respective domestic currencies. Nevertheless, the significant disparity in trade volume between the two parties has resulted in a substantial trade deficit, which has impeded the utilization of domestic currency in the context of bilateral trade. Nevertheless, the circumstances also presented the potential for the introduction of a completely novel currency as a means of alleviating the dominance of the US dollar. The determination to retain the currency encompasses more than just a technical aspect and presents various potential solutions.
[Photo by Alexxx1979, CC BY-SA 4.0, via Wikimedia Commons]
*S. M. Saifee Islam is a Research Analyst at the Center for Bangladesh and Global Affairs (CBGA), Dhaka, Bangladesh. The views expressed in this article are those of the author and do not necessarily reflect TGP’s editorial stance.