The Rupee-Rouble deal between Russia and India is in jeopardy due to the presence of USD 147 billion worth of surplus Indian Rupees in Russia’s Indian bank accounts. External Affairs Minister S. Jaishankar held discussions with Sergey Lavrov, the Russian Foreign Minister, on the sidelines of the East Asia and G20 Summits on the repatriation of rupee reinvestments to India. As India’s imports stagnated due to a massive trade deficit of USD 43 billion, Russia found itself with a surplus of rupees.

The Rupee-Rouble deal was initiated following the Russia-Ukraine war, after Russia was put under sanctions by the US and Europe. While New Delhi was rebuilding its economy from the shackles of the Covid 19 pandemic, the Russia-Ukraine war presented a new window of opportunity, as Russia offered discounted oil to India.  As India imports 85 percent of its oil requirements, purchasing discounted energy from Russia was an attractive way to control costs, despite the fact that the Indian economy was on the path to a speedy recovery. 

  In April 2022, the average price of Russian crude to India was approximately USD 68.21 per barrel, whereas India’s long-term energy partner Saudi Arabia sold oil for USD 86.96 per barrel. This provided Indian refiners with discounts on Russian crude oil of up to USD 20 per barrel. In 2022-2023, India’s imports from Russia increased by 369% to approximately $46.3 billion, primarily due to crude shipments. Currently, India imports between 40 and 46 percent of its crude oil from Russia, which will become India’s primary oil supplier by 2022. In the ten months following the outbreak of the war, India was able to save an estimated USD 3.6 billion by purchasing discounted crude oil.

As Russian Banks were banned from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) mechanism, this compelled New Delhi and Moscow to look for alternate options to continue the energy trade. The countries had agreed to settle a greater share of trade in national currencies and redirect the shipments eastward because of the ban, which in a way had led to the use of local currencies for international trade. The framework agreed upon allows Indian exporters to be paid in Indian rupees for their exports to Russia instead of standard international currencies and vice versa through vostro accounts.  However, there are certain challenges that have emerged in the Rupee-Rouble trade due to the lack of international usage of rupees, as only 18 countries have accepted Indian Rupee payments. India’s trade deficit with Russia reached USD 43 billion in 2022-2023, while India’s exports to Russia amounted to less than USD 3.14 billion. India, unlike China, does not establish a large number of businesses in Russia in order to increase trade in rupees. This is because India’s manufacturing sector is not as large or cost-effective.  

To overcome these obstacles, India proposed reinvesting the rupee back into India via bonds and infrastructure, in accordance with the RBI’s framework, with dividends paid back to Russia via Indian bonds. Russia could invest 147 billion USD in Indian bonds and infrastructure, which is double the amount of their defence budget for 2022, which they need to support the war efforts in Russia because they are experiencing a financial crunch. Moreover, India’s yield on these bonds is currently only 7%, and the Indian currency has depreciated in recent years.  Therefore, it is a long-term investment of approximately 10 years that will result in a loss for Russia. 

In this context, there are numerous viable short-term options, each with its own set of obstacles. Based on India’s trade with Iran, which utilises a split exchange rate system, experts recommend applying a similar method here. In India’s rupee-rial deal with Iran, 45% of transactions are conducted in rupees and the rest in euros. With Russia, however, India is prohibited from using western currencies due to sanctions, leaving only the Chinese Yuan as a viable alternative. India has its own geopolitical reasons not to widely use the Chinese Yuan as a viable option.   

The Structured Financial Messaging System (SFMS) of India and the System for the Transfer of Financial Messages (SPFS) of Russia could be used as alternate financial architectures to SWIFT to facilitate Rupee rouble trade. Since SFMS is restricted to India’s domestic use, SPFS appears to be a viable alternative; however, Russia needs to establish a specialised fintech company in India to enable Indian banks to utilise SPFS technology and mitigate the risk of potential sanctions.

The trilateral rupee settlement mechanism is yet another method for addressing the current difficulty. The UAE holds a distinct advantage as it not only ranks among India’s major trading partners but has also emerged as Russia’s primary trade hub in the Middle East. There was a remarkable 68 percent increase in trade between Russia and the UAE in 2022. But the success of this is not very promising, as India also faces a trade deficit with the UAE, and the same issue might arise there as well.  

A long term solution to this dilemma posed by the trade in local currencies is to eventually build a trade ecosystem and improve economic relations with other countries. India needs to build a strong manufacturing hub by scaling up production and improving cost efficiency to promote the international usage of the rupee. India also needs to increase foreign direct investment (FDI) by easing the barriers to doing business in India. One of New Delhi’s greatest challenges is ensuring that India’s trade partners continue to have faith in trading with India and in Indian currency.   


(This article was first published on Eastern Herald)

Views expressed by the author are personal and need not reflect or represent the views of the Centre for Public Policy Research.

Senior Associate, Research at CPPR

Anisree Suresh is a Senior Associate, at Centre for Public Policy Research (CPPR). She completed her M.A in International Studies from the School of International and Area Studies, Goa University. She has done a couple of research internships at reputed research institutions of IR. Her master’s dissertation was on BIMSTEC and Indo-Pacific and published a research paper on the same. Her research interests pertain to security studies, South Asia, Indo-Pacific, IR theory and gender.

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Neelima completed her Post Graduation in MA Geopolitics and International Relations from Manipal Academy of Higher Education. While pursuing her masters she has done her 3 months Internship from the Middle East Institute, New Delhi. After completion of the course she worked for 2 months as IR project Intern at Centre for Public Policy Research, Kochi. She is passionate about research and writing in the field of International Relations. Her Interest areas include West Asia, Indo-pacific, Multilateralism, Global and National Security.

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