How Russia can solve the problem of rupees stuck in India

In trade settlements with India, Russia has accumulated “billions” of limited convertible rupees in accounts in Indian banks, which it cannot use. This was announced by Foreign Minister Sergei Lavrov during a press conference following the meeting of the Foreign Ministers of the Shanghai Cooperation Organization (SCO) countries in Panaji (Goa) on May 5.

“This is problem. We need to use this money. But for now, these rupees have to be converted into another currency. The issue is being discussed,” Lavrov said, without explaining what alternatives are being considered by Russia and India (quote according to the transcript on the website of the press service of the Russian Foreign Ministry). The day before, Reuters, citing Indian government sources, announced the suspension of negotiations on trade in rupees between Moscow and Delhi. The interlocutor of the agency then stressed that the Indian side “tried everything they could to try to make it work.” Another source explained that most bilateral payments continue to be made in US dollars, as well as dirhams and “several other currencies.”

By data of the Indian Ministry of Commerce, Russia moved up 16 positions to become India’s fourth largest source of goods imports for India in fiscal year 2022-2023 (ended March 31) and fifth overall trading partner. The volume of imports of Russian goods increased from $9.86 billion to $41.55 billion. The share of Russia in the structure of Indian imports increased from 1.6% to 6.5%. At the same time, exports from India to Russia amounted to $2.8 billion, while the deficit for Delhi, thus, amounted to $38.74 billion. All imports of goods into the country for the corresponding reporting period increased by 16.5% to $714 billion compared to $613 billion in fiscal 2021-2022. Exports of goods of the country for the same period amounted to $447 billion ($442 billion a year earlier).

Experts interviewed by Vedomosti agree that the reason for the difficulties in Russian-Indian trade settlements in rupees lies in the structural features of the Indian economy itself, imbalances in bilateral trade and the country’s trade as a whole.

India is a country with a high trade deficit and overall current account deficit: the need for imports is almost twice the capacity for exports, said a leading analyst “Opening investments” Andrey Kochetkov. Russia supplies India with goods that are in world demand, while Delhi has very little to offer, the expert is sure. In his opinion, Indian companies can replace Europe in textiles, medicines, and exotic food items. They can also increase the supply of goods from Western companies manufactured in India. But these operations may be subject to special sanctions control, warns Kochetkov.

The idea of ​​abandoning dollars and switching to national currencies in trade initially had a defect, Anton Prokudin, chief macroeconomist of Ingosstrakh-Investments Management Company, believes: the volumes of exports and imports between countries are obviously not equal. The accounts of Russian companies constantly accumulate currencies of other countries, to which exports go, the expert states. To use them, you need to exchange them for the currencies of other countries with a strong financial system, says Prokudin.

The deficit of rubles in Indian banks due to the imbalance of trade has created difficulties for Russian companies in converting revenue in rupees into rubles, it can only be carried out in the domestic Indian market, explains Associate Professor of the Department of State and Municipal Finance of the Russian University of Economics. G.V. Plekhanova Elena Voronkova. According to her, the investment of Russian companies in Indian stock values ​​is also difficult because of the fear of Western sanctions by the Indian side.

At the same time, the issue of equalizing trade with India is not the most urgent for the economy, says Arthur Leer, vice president of the Association of Exporters and Importers. In his opinion, it is better to dispose of assets correctly than to make wrong hasty decisions. He recalls that this situation is not new for Russia – in 2022, there was an imbalance in trade with the EU, Turkey and China. Chief Analyst Sovcombank Mikhail Vasiliev agrees that the surplus of rupees is not being put to good use. “At the same time, after converting to another currency, Russia will be able to quickly use them to resolve current issues, such as buying imports and financing foreign projects,” he says.

Taking into account the fact that it is impossible to qualitatively dispose of the accumulated rupees at the moment, and transactions in dollars and euros create the risk of blocking, analysts interviewed by Vedomosti consider the most logical solution to transfer trade settlements to third currencies that are of interest to Russia and India – mainly Asian ones.

In mid-April, the Financial Times, based on data from the international interbank information transfer system SWIFT, calculated that the share of the yuan in global trade settlements increased from 2% in February 2022, when Russia launched a military special operation in Ukraine, to 4.5% by February 2023 Exactly the same amount – 2.5% – decreased the share of the dollar in world trade. In February 2022, 86.8% of trade settlements were carried out in it, and in February 2023 already 84.3%. The share of the euro in international trade settlements is 6% and does not change significantly.

Switching to Chinese yuan or UAE dirhams may be the most obvious and acceptable solution, Vasilyev said. Firstly, the expert says, these currencies are stable against the dollar, and secondly, Russia and India trade a lot with China and the UAE, so these currencies are in demand. Vasilyev envisions a scenario in which Russia can use its surplus in trade with India to buy goods in China for yuan and in the UAE for dirhams. A way out of this situation is possible, Voronkova admits, if you also use the Hong Kong dollar.

Also liquid, according to Prokudin, are Indonesian rupees, Brazilian reals and Mexican pesos. But in any case, the system using two currencies in mutual trade will continue to create complex settlement chains, increasing transaction costs in international trade, the expert believes.

The transition to settlements with India in yuan and dirhams is no different from using the dollar, Kochetkov disagrees, since the main problem – trade imbalance – will persist. In his opinion, a partial way out of the situation can be found if not the rupee and other currencies are used, but precious metals or if production of goods necessary for Russia is organized. “It is estimated that over 100,000 tons of silver and over 20,000 tons of gold are in the hands of the Indian population. In the sphere of production, the problem is that so far Russia itself is organizing licensed production in India, including the defense industry,” says Kochetkov.

Organizing re-exports for rupees of goods from countries with which India has closer trade relations could also be a solution to the problem, agree Leer and Kochetkov. However, according to the latter, this is complicated by the fact that many goods are subject to special sanctions control, and in Russia they are not in short supply or are not in demand, Kochetkov argues. Therefore, Moscow still has a way to reinvest Indian rupees in the development of the Indian economy in a beneficial way, the expert concludes.