Rupee-Rouble mechanism: Following Russia’s invasion of Ukraine, the European Union has banned global transactions with Russian firms using euro-denominated banknotes, while the United States has restricted Russia’s access to the dollar. As a result, India, which still trades with Russia, is considering resurrecting the Rupee-Rouble system, which was last used in 1953.
What is the mechanism of the Rupee-Rouble?
The Rupee-Rouble trade arrangement is a payment mechanism that allows dues to be settled in rupees rather than dollars or euros. The notion was born in 1953 as part of the Indo-Soviet trade deal.
Article VI of the Indo-Soviet Treaty states:
- All transfers between India and the then-Soviet Union of Soviet Socialist Republics (USSR) can be made in Indian Rupees.
- The State Bank of the USSR will keep one or more accounts with one or more commercial banks in India that are authorized to deal in foreign exchange for this purpose. In addition, if the State Bank of the USSR deems it necessary, it will keep a separate account with the Reserve Bank of India.
- All commercial transactions requiring Rupee financing will be conducted through commercial bank accounts, with the Reserve Bank of India’s account being utilized primarily to replenish balances with commercial banks when necessary.
- Payments made to and by Indian citizens and USSR residents will be debited or credited only to those accounts.
- The accounts will be replenished by (a) transferring cash from another State Bank of the USSR account with a commercial bank or the Reserve Bank of India, or (b) selling Sterling to the bank in question.
The funds were used to pay for:
- Insurance, freight, port charges, storage, and forwarding costs, and bunkering are all covered by commercial transactions.
- Films are distributed.
- Assistance with technical issues.
- Tours that are either commercial or cultural in nature.
- Maintenance of the Indian Embassy in the Soviet Union, as well as the Soviet Union’s Embassy and Trade Representation in India.
- Other non-commercial payments were agreed upon by the Reserve Bank of India and the USSR State Bank Center on resurrecting the Rupee-Rouble mechanism.
External Affairs Minister S Jaishankar told Parliament on March 24, 2022, that a multi-ministerial group had been formed to look into how to solve problems in trading with Russia, such as managing payments for exporters and importers, implying a possible return of the ‘Rupee-Rouble trade.’
“Because of the increasing challenges in dealing with Russia, [the] administration is evaluating different aspects, including the payment element,” Jaishankar said in response to a question from Akali Dal MP Naresh Gujral on whether the government will resume rupee commerce with Russia.
“Within the government, there is a group made up of many Ministries. The Finance Ministry is in charge of looking into these issues,” he continued. In May, a Russian delegation may travel to India to examine the Rupee-Rouble payment system.
Why should the Rupee-Rouble trade be revived?
During the conflict in Ukraine, over 40 US and European allies have imposed economic restrictions on Russian institutions and organizations. According to Bloomberg, Indian exporters are waiting for $500 million in payments that have been delayed due to the restrictions.
According to the Department of Commerce, India will import Rs. 64,623 crore from Russia in 2021-22, representing a 59.04 percent increase over the previous year. This amounted to 1.58 percent of India’s total imports.
Furthermore, India’s exports to Russia will be worth Rs 23,658 crores in 2021-22, up 20.4 percent from the previous year. In 2021-22, India’s overall trade with Russia was Rs 88,281 crores, up 46.45% from the previous year. India-Russia commerce is valued at Rs 68.98 lakh crores in total, accounting for only 1.28 percent of India’s overall trade. The trade gap between India and Russia is Rs 12.83 lakh crores, including crude oil and defense trade.
Imports of oil and defense equipment into India
In the face of lowering oil prices, India, a net importer of Russian goods, has increased its imports of Russian crude oil. According to Reuters, India has purchased at least 13 million barrels of Russian oil since the Ukraine war began on February 24, a significant increase above last year’s total of 16 million barrels.
In addition, India is awaiting delivery of the S-400 air defense systems, which was agreed upon in 2018. The $5.43 billion agreement is threatened with US sanctions under the CAATSA (Countering America’s Adversaries Through Sanctions Act).
In addition, numerous other deals are in the works for the Indian Air Force, including 12 Su-30MKI aircraft and 21 MiG-29 fighter fighters. However, in order to promote domestic manufacture, the Defense Ministry is reviewing all direct import agreements.