Rupee-rouble trade arrangement

  • IASbaba
  • March 12, 2022
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  • GS-2: International Relations

Rupee-rouble trade arrangement

What is Rupee-Rouble trade arrangement? 

  • Rupee-rouble trade is a payment mechanism which can allow Indian exporters to be paid in Indian rupees for their exports to Russia instead of standard international currencies such as dollars or euros. 
  • 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. 
  • If the specified amount is say, $100 million, then the Russian bank’s account in India will have rupees worth that amount while the Indian bank’s account in Russia will have roubles worth that amount.
  • Once the payment mechanism is in place, the Indian exporter can be paid in rupee from the Russian bank’s account in India and imports from Russia can be paid for with roubles from the Indian bank’s account in Russia.

Has it been attempted before? 

  • India has attempted the rupee-rouble payment mechanism with Russia on a very small scale earlier for a few items like tea. But it has happened in normal times and never on a large commercial scale.
  • A rupee-rial payment mechanism, however, had successfully worked in India’s trade with Iran when economic sanctions were imposed on Iran by West in 2012.
    • India successfully used the mechanism for partly paying for its oil purchase from Iran. 
    • This worked well for several years till the Trump regime placed product-specific sanction on oil trade with Iran and India stopped its purchases from the country.

How critical is the rupee-rouble mechanism for India? 

  • It is important for India to have an alternative payment mechanism in place with Russia as the US, the EU and the UK have blocked at least seven Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT)
    • SWIFT is a global secure interbank system that communicates payment instructions and enables transactions between banks from all the countries around the world. 
  • An estimated $500 million is pending for goods already shipped by Indian exporters and it is now not possible to get the payment through the regular SWIFT channel. 
  • Since transaction with Russia cannot be carried out in international currencies such as the dollar or the euro, a rupee payment mechanism will determine if the trading will continue or not.

What are the problems that may crop up? 

  • 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.
  • This is a risk that India will have to take if it decides to go ahead and put a rupee payment mechanism in place.
  • At present, there is only a sanction against the use of SWIFT. There is nothing to bar India from trading with Russia using alternatives such as a barter system or a rupee-rouble payment mechanism. 
  • However, if the sanctions turn product-specific, then it may be difficult for India to use this arrangement

What are the strategic ramifications for India?

  • The world would see this as an arrangement by India to by-pass the sanctions post-Russia’s invasion of Ukraine
  • The US and the EU are already unhappy with India for abstaining at the UN Security Council and the UN Human Rights Commission on all resolutions that criticise Russia for invading Ukraine
  • 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 powers.

Connecting the dots:

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