02

Without involving the US dollar, ten months ago, it seemed straightforward for Indian refineries to import petroleum crude from Russia at a lower price. However, the situation changed when the war broke out between Russia and Ukraine, leading the US and its allies to prohibit Russia from exporting crude at a price exceeding US$60 per barrel. The intention behind setting a price cap was to prevent Russia from utilizing export earnings, including dollars and other hard currencies, to finance the war against Ukraine. India was eager to take advantage of this opportunity to purchase crude at a lower price, given that the global crude prices ranged from $110 to $123 per barrel, and the war posed a threat to supply chains. Additionally, there were efforts to restrict foreign exchange reserves held in dollars.

As a further measure, payments to Russia were banned from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. Since most international payment settlements rely on SWIFT, conducting business with Russia became exceedingly challenging. Nevertheless, alternative methods were employed successfully, such as utilizing third parties for customary payments involved in global commodity trading, where specialized trading houses facilitated trade between countries. Unlike the punitive measures taken against Iran, these efforts were less severe. The current situation does not pose such a dire threat.

Initially, the idea seemed feasible as India required cheaper crude, and Russia desired to maintain India as a trusted trading partner, given its historical position as a non-aligned nation. Both countries were keen on sustaining their positive relationship and sought to establish a rupee-rouble trade agreement. Over the past year, efforts have been underway to achieve this objective. The proposed agreement involved India making payments in rupees converted to roubles for imports, while Russia would reciprocate by using rupees for their imports, with the exchange rate being determined by market factors since both currencies are not as freely convertible as the US dollar. Unfortunately, the year-long efforts have not produced any tangible results, making the situation even more challenging.

The trade deficit between India and Russia has now reached unprecedented levels. Conversely, Russia enjoys a trade surplus, particularly in the export of petroleum crude. Official data reveals that India’s merchandise imports from Russia have increased nearly fivefold to approximately US$51.3 billion since the invasion of Ukraine on February 22, 2022, compared to US$10.86 billion in 2021-22. In addition to the price cap of US$60, Indian refineries were benefiting from discounts of up to $20 per barrel on Russian crude. Meanwhile, Indian exports during this period decreased to US$3.43 billion from US$3.61 billion in the previous year. Consequently, the trade surplus in favor of Russia has soared to US$48 billion, leading to a negative figure (-US$48 billion) as India’s trade deficit.

The Reserve Bank of India (RBI) has already established rupee trade settlement arrangements in 18 countries. Sixty banks are authorized to open Special Vostro Rupee Accounts (SVRAs) for settling payments in Indian Rupees. These countries include Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the UK. Table 1 provides a list of these 18 countries, indicating their trade balances through positive (+) or negative (-) signs, denoting surpluses or deficits in merchandise trade.

According to a Reuters report last month, talks between India and Russia regarding settling bilateral trade in rupees were reportedly suspended. The news that Indian negotiators failed to convince their Russian counterparts to maintain rupee reserves dealt a significant blow to Indian importers of cheap crude oil and coal from Russia. However, official Russian sources promptly dismissed this as “wishful thinking.”

Given Russia’s substantial trade surplus exceeding US$40 billion, there were limited opportunities to utilize rupee reserves for imports from India. India’s share of global merchandise trade stands at approximately 2%, significantly lower than that of the US (8%) and China (15%). The main shortcoming lies in India’s lack of economic diver-sification and a broad manufacturing base for consumer goods, in contrast to China. India’s exports are limited in scope (see Table 2).

Professor Nandan Unnikrishnan, a Russia expert at the Observer Research Foundation (ORF) in New Delhi, proposed several options during an interview with Deutsche Welle (DW), the German radio and TV station, last month. He suggested considering a third country currency, such as the United Arab Emirates dirhams or the Chinese yuan. Russia can easily pay in yuan for the goods it requires,

given their bilateral trade worth several billions of dollars. China’s more di-versified economy allows it to satisfy its import needs across various sectors. However, due to the current tense political situation, it is unlikely that this option will be pursued, as Reuters reported that India has asked banks and businesses to avoid using the yuan for paying for Russian imports.

Another alternative is to use UAE dirhams to pay for India’s Russian imports. However, as reported by DW’s Diplomat, this solution “might not offer a viable long-term solution, due to the sensitivity of that currency to Western sanctions.” Professor Unnikrishnan suggests that India and Russia may consider investing rupees in joint ventures that produce goods useful to Russia or that could be exported to other parts of the world.

Additionally, Russia has the option to invest in Treasury Bills and long-term bonds issued by India.

“A storm in a teacup”

In the meantime, the European Union (EU) sparked a political dispute last month. Although sanctions were imposed on Russia, including bans on crude oil exports and price caps, individual member countries did not object to importing refined petroleum products from India, deeming them acceptable. They either turned a blind eye or pretended to be unaware of the origin.

While the US and the European Union were well aware that India did not explicitly condemn Russia for its invasion, they did not expect nor appreciate India exporting refined petroleum products to Europe, given the association with Russian crude. The Netherlands, benefiting from cheaper imports of petroleum products from India, experienced a trade deficit with India for the first time in 2022.

The displeased EU called for a crackdown on India’s “re-selling of Russian crude,” claiming that it violated EU Regulation 833/2014, which prohibits re-exports of Russian crude. India countered this accusation with a legalistic interpretation, arguing that once the crude is substantially transformed in a third country, it can no longer be considered Russian. The Western powers, led by the US, now require India (as a member of the Quad) more than ever before as a counterbalancing force in Asia against China, particularly in the event of an attack on Taiwan. The Quad, led by the US, recognizes that India may bear the brunt of any potential conflict on its Himalayan border with China if the US intervenes in defense of Taiwan.

Given these circumstances, it is crucial for India to go beyond halfway in the ongoing negotiations with Russia to resolve the challenges faced in the rupee-rouble trade arrangement.

—  Dr. T. K. Jayaraman, a former Professor at Fiji National University, Fiji Islands, and a Senior Economist at the Asian Development Bank, currently serves as an honorary adjunct professor at Amrita School of Business, Bengaluru Campus.