India’s efforts to internationalize the rupee have stalled following the failure of its negotiations to use it to trade with Russia.
Russia, which prefers the Chinese yuan, is hesitant to adopt rupee trade as that would leave Moscow with undesirable rupee reserves of more than $40 billion annually, Reuters reported last week.
“We don’t want to push rupee settlement any more, that mechanism is just not working. India has tried everything we could to try and make this work but it hasn’t helped,” unnamed government sources told Reuters. This quashes the hopes of India’s oil and coal importers who were looking to reduce currency conversion costs.
A rupee-rouble trade arrangement was necessitated due to a spurt in Russia-India trade after Western nations imposed sanctions on Russia early last year following the Ukraine invasion.
Since Russia relies heavily on revenues from oil and natural gas, it offered heavy discounts to India which imports 85% of its fuel needs. April 2023 alone saw a nearly 530% rise in imports by India over April 2022. India’s defense imports have also risen, making Russia, India’s fifth-largest trading partner.
However, acute exchange-rate volatility has soured things for Russia.
Why Russia prefers the Chinese yuan?
Besides the Indian rupee, India’s trade payments to Russia have been a mix of UAE dirhams and the Chinese yuan so far.
“Private sector companies are using dirham, and PSUs are going for INR [Indian rupee] because complete (trade) settlement in yuan would mean that India is accepting China, and [prime minister Narendra] Modi wouldn’t want it,” a senior treasury official at one of India’s private sector banks told Quartz, requesting anonymity.
Russia, meanwhile, prefers the yuan. This is because Russia-China bilateral trade has grown more rapidly and is stronger than India’s. In 2022, it reached a record high of $190 billion—Russia’s trade with India stood at a mere $35.3 billion comparatively.
In 2022, the share of yuan payments in Russian imports rose to 23% from 4% before the Ukraine war, The Guardian reported. Transactions involving the yuan and Russian rouble have now overtaken those involving the US dollar-rouble pair. Russian counterparties are now increasingly willing to accept the yuan as a mode of payment.
What are the hiccups in the rupee trade mechanism?
In March 2022, western economies banned Russia from SWIFT, the network used globally to settle payments. Countries trading with Russia then scrambled to find alternative methods of payment.
India pushed for settlement in rupees, but seldom found takers due to three reasons: the rupee is not fully convertible, it has been weakening, and the fact that Russia exports more to India than it imports.
For starters, India has a huge and widening trade deficit with Russia. Its imports from Moscow in the last fiscal until February were nearly 15 times its shipments back to Russia, according to India’s trade ministry data.
This makes the rupee payment mechanism futile because Russia, even after paying for all its imports from India in rupees, would be left with a lot of Indian currency that cannot be used elsewhere.
“We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now,” Russian foreign minister Sergei Lavrov said on May 5, on the sidelines of the Shanghai Cooperation Organization (SCO) meeting in Goa, according to Bloomberg.
The two countries are now seeking a way around the impasse.
Credit: Yahoo News