If this mechanism picks up, it could also open a window for Indian exporters to ramp up sales to Russia
Mumbai, India–Indian authorities are actively considering dedicated payment mechanisms for trade with Russia to enable existing trade obligations in the wake of sanctions imposed on the Kremlin, a move that will also pave the way for cheaper oil imports to meet the country’s energy demands.
In the past month, as sanctions have been imposed on Russia, the scope of a payment mechanism in local currencies has expanded from being a means to sustain ongoing trade to possibilities of deeper engagement, including increasing bilateral trade.
For the rupee-rouble mechanism to be implemented, Indian importers would pay for goods to the accounts of Russian banks in India and they in turn would make the payment in roubles to the Russian exporters. But since India’s imports outweigh its exports, the only way the Russian banks can get rid of their piled up rupees is if India exports more, experts say, opening up an opportunity for manufacturers of agricultural machinery, medicine, furniture and bathroom fittings, among other goods, who are looking for new markets.
“We need to be aware of where Russia would want to look at import substitution,” said Nandan Unnikrishnan, distinguished fellow at the Observer Research Foundation (ORF). Some of those exports will come from India’s medium and small industries who can also look at setting up units in Russia, he added. “They don’t have a lot of experience with SMEs [Small Medium Enterprises] and we have a huge amount of experience there that we could share practically and on the ground.”
Cheap Russian Oil
India imports 86 percent of its oil requirements. On Tuesday, India’s crude oil basket was priced at $109 per barrel for its crude imports. While down from $128.24 per barrel earlier in the month, it was still up from $95.47 per barrel the day before the Russian invasion. The sharp rise in oil prices since the start of the Russian invasion will widen India’s gaping current account deficit and push inflation higher, eroding the value of the domestic currency.
While India gets only a tiny 2 percent from Russia, it can ramp up those purchases, and reportedly has already started to do that given Russia’s offer to sell at a discounted rate and bear the cost of transportation and insurance. The prospect of cheaper supplies from Russia would no doubt help New Delhi manage its finances better.
Currently, India’s trade with Russia is largely skewed towards imports — which is why the country maintains a substantial trade deficit. According to Indian government data, the two countries had bilateral trade amounting to $8.1bn during the financial year April 2020 through March 2021, where Indian exports were at $2.6bn while imports from Russia were at $5.48bn.
This bias will remain and may tilt more in the direction of imports especially if it increases its purchases of oil from Russia. Unless, of course, India ramps up exports.
“The exporter community is definitely looking at opportunities that are going to come [along] the way,” said Ajai Sahai, director general and chief executive of industry body the Federation of Indian Export Organisation.
However, he cautioned, Indian banks are averse to backing trade with Russia even on goods that are allowed under the sanctions. To circumvent those troubles, FIEO has submitted a proposal to India’s Ministry of Commerce suggesting a rupee-rouble mechanism as well as a rupee-based trade mechanism where the contract is made in the local currency, the rupee, and the other party bears the exchange rate risk.