In the wake of the Russian invasion of Ukraine, the European Union has prohibited global transactions with Russian entities using euro-denominated banknotes, while the U.S. has cut off Russia’s access to the U.S. Dollar. This has made India, which continues to trade with Russia, consider reviving the Rupee-Rouble mechanism, previously used in 1953.
What is the Rupee-Rouble mechanism?
The Rupee-Rouble trade arrangement is an alternative payment mechanism to settle dues in rupees instead of Dollars or Euros. The idea was first conceived in 1953 under the Indo-Soviet trade agreement.
Under Article VI of the Indo-Soviet agreement:
- All payments between India and the then Soviet Republic USSR may be made in Indian Rupees.
- For this purpose the State Bank of the U.S.S.R. will maintain one or more accounts with one or more commercial banks in India authorised to deal in foreign exchange. In addition, the State Bank of the USSR will, if that Bank considers necessary, maintain another account with the Reserve Bank of India.
- All commercial transactions to be financed in Rupees will take place through the commercial bank accounts while the account with the Reserve Bank of India will be used only for replenishing the balances with the commercial banks when necessary
- Payments made to and by Indian residents and USSR residents will be done only in those specified accounts by debiting/crediting.
- The accounts will be replenished by (a) by transfer of funds from another account of the State Bank of the USSR with another commercial bank or with the Reserve Bank of India; or (b) by the sale of Sterling to the bank concerned.
The payments covered:
- Commercial transactions and covering insurance, freight, port charges, storage and forwarding expenses and bunkering
- Distribution of films
- Technical assistance
- Tours of commercial or cultural nature
- Maintenance of Embassy of India in the USSR and of the Embassy and the Trade Representation of the U.S.S.R. in India
- Other non-commercial payments agreed between Reserve Bank of India and the State Bank of the USSR
Centre on reviving Rupee-Rouble mechanism
On March 24, 2022, External Affairs Minister S Jaishankar told Parliament that a multi-ministerial group had been convened to look into how to overcome challenges in trade with Russia, including managing payments for exporters and importers — indicating a possible revival of the ‘Rupee-Rouble trade’.
In response to a question by Akali Dal MP Naresh Gujral on whether the government would reactivate rupee trade with Russia, Jaishankar said “because of the emerging problems in dealing with Russia, [the] government is examining various aspects, including the payment aspect”.
“There is a group within the government composed of different Ministries. It is led by the Finance Ministry to examine these matters,” he added. Russian delegation may visit India in May to discuss Rupee-Rouble payment mechanism.
Why revive Rupee-Rouble trade?
Over 40 U.S. and European allies have imposed economic sanctions against Russian banks and entities amid the war in Ukraine. As per Bloomberg, Indian exporters are awaiting payments of about $500 million that have been delayed amid the sanctions.
According to the Department of Commerce, India currently has imports worth Rs. 64,623 crore from Russia in 2021-22, which is 59.04% growth from last year. This constituted 1.58% of the total imports of India.
Moreover, India’s exports to Russia is worth Rs 23,658 crores in 2021-22, which is a 20.4% growth since last year. India’s total trade with Russia amounted to Rs 88,281 crores in 2021-22, which is a 46.45% growth. In total, India-Russia trade is worth RS 68.98 lakh crores — a mere 1.28% share of India’s trade figures.
India’s trade deficit with Russia amounts to Rs 12.83 lakh crores, which include crude oil, defense trade.
India’s imports of oil and defence equipment
India — being a net importer of Russian goods — has currently increased its import of Russian crude oil amid falling oil prices. According to Reuters, India bought at least 13 million barrels of Russian oil since the Ukraine war began on February 24, a steep rise from last year, when India bought 16 million barrels of Russian oil in all of 2021.
Moreover, India is also awaiting the timely delivery of the S-400 air defence systems under a deal signed in 2018. The deal — worth $5.43 billion — faces looming U.S. sanctions under CAATSA (Countering America’s Adversaries Through Sanctions Act.
In addition, several new deals are in the pipeline including 12 Su-30MKI aircraft and 21 MiG-29 fighter jets for the Indian Air Force. However, the Defence Ministry is carrying out a review of all direct import deals in a bid to promote domestic manufacturing.
