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The solution works as long as the value of trade is balanced in terms of exports and imports. Image Credit: Shutterstock

Dubai: India’s businesses and banks have been working on ways to unclog the payments mechanisms to facilitate trade with Russia after the imposition of Western sanctions on the country. At this point, it is unclear if any options will be viable for Indian entities given that the sanctions even extend to a ban on leading Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication) that facilitates global financial transactions.

The Belgian-based SWIFT consortium links more than 11,000 financial institutions in more than 200 countries and territories, thus acting as a critical hub enabling international payments. Cutting off Russia from the network has caused significant disruption to the nation’s trade with the rest of the world and its access to global financial markets.

What is the rupee-rouble trade?

Among the options available for Indian businesses to trade with Russia are the rupee-rouble trade, which dates back to the Cold War era when the erstwhile Soviet Union and India facilitated trade circumventing US dollar payments. The mechanism allowed payments for imports from Russia in rupee and Indian exports to Russia paid in rouble. It effectively worked as a traditional barter system.

The solution works as long as the value of trade is balanced in terms of exports and imports. However, any mismatch in trade balances tilting in favour of either country will be difficult to be resolved without a cross-currency settlement mechanism. India had effectively used rupee payments in its trade with Iran for the past several years until the US re-imposed sanctions following the withdrawal from the nuclear deal by the Trump administration.

New Delhi and Tehran had a barter-like mechanism for trade settlements, wherein Indian oil refiners were paying in rupees to a local Iranian bank and the funds were used by Tehran to pay for imports from India. This pushed Iran to become the largest source market for crude for India.

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Is barter viable?

The answer is both yes and no. Yes, in the case where if the trade partners can find a way to agree on exchange rates and settle the trade balances fully through exchange of goods and services. Settlement will be a big problem when currencies involved are not fully convertible and are subject to big fluctuations in exchange rates. In the case of rupee and rouble, the currencies have faced significant value erosion and volatility in exchange rates due to weak economic fundamentals and geopolitics.

In trade between India and Russia, the trade balance is largely tilted in favour of Russia with its exports to India totaling $5.5 billion and the corresponding Indian exports just about $2.5 billion in 2021. Indian banking sources said it can be made to work mostly in defence-related deals with both governments agreeing on the exchange rates. However, analysts say large bilateral trade deals such as oil imports from Russia will likely face huge hurdles in terms of payments.

Indian banks cautious

Several Indian banking sources told Gulf News they have been very cautious in transacting with Russian banks and counterparties in the context of the sanctions. Transactions made through large Russian banks have ground to a halt. While some the smaller Russian banks were spared from sanctions, the Reserve Bank of India (RBI) advised banks to do due-diligence before initiating any transaction, a State Bank of India (SBI) source told Gulf News. The RBI or the Government of India are yet to issue any formal advisory to banks on executing transactions with Russian banks.

Missing correspondent relations

Bankers say even when some Russian banks are spared from sanctions, it will be difficult for Indian banks to make payments to Russian counterparties through these institutions, because they will need to work through SWIFT’s Relationship Management Application (RMA) system. (The RMA is an authorisation mechanism, allowing banks to define which counterparties can send them financial messages.)

“Adding to the hurdles is the absence of correspondent relations between smaller Russian banks and Indian banks,” said an SBI source. “Thus establishing a payment channel through small banks are going to be a slow process under thorough scrutiny.”

The direct impact of the Russia-Ukraine war is limited on Indian banks as their direct exposure to Russian counterparties is small. However, the conflict is likely to weaken overall asset quality as some clients doing business with Russia could face payment disruptions.