With western countries imposing sanctions on Russia, India and Russia have been working to fast track an alternative trade settlement mechanism.
The alternative payment mechanism that is being talked about is the rupee-ruble trade arrangement. India successfully used the mechanism for partly paying for its oil purchase from Iran. This worked well for several years.
WHY?
India perspective:
+ Current crash in Russian economy would result in longer receivable cycle for Indian exporters.
+ Chances of Russian importers defaulting on payments.
+ There is an opportunity to reduce its import bill, where the global oil prices are sky rocketing. Discounted price offer from Russia is a win-win.
Russia perspective:
+ Russia has few trading partners at the moment and it’s having trouble monetising one of its biggest assets i.e. CRUDE
Challenges
1/ The recent fluctuation in the value of ruble could make it difficult to implement the rupee-ruble payment mechanism and establish exchange rates. Hence The central bank of both the countries need to agree upon the same, considering Ruble has tanked 30% against the dollar already.
2/ If the value of the ruble continues falling sharply, then trading may not happen as the ruble in the Indian bank’s Russian account will lose value. This is a risk that India will have to take if it decides to go ahead and put a rupee payment mechanism in place.
3/ Trade imbalance. India has $5 billion trade deficit currently and with import of crude, this would only widen further.
In fact, it was done in 1953, when the Indo-Soviet Trade Agreement was signed. This didn’t go so well in the long run because Russia didn’t need as many things from India as India did from the other. So, Russia ended up with a lot of rupee reserves.
Challenge for Russia would arise when it wants to buy equipment’s from Korea, but Korea won’t accept payment in rupees. And hence what’s the use of money if you can’t use it anywhere?
4/ Risk of any sanctions imposed on India. Like the Trump regime placed product-specific sanction on oil trade with Iran and India had to stop its purchases from Iran.
