While government officials say India is not really worried about deteriorating trade relations with Russia over its problem of rupee accumulation, some exporters in that country were impatient over the issue.
The issue began when the US and other Western economies imposed sanctions on Russia following its invasion of Ukraine in February last year.
An element of these sanctions also meant cutting off Russian businesses from the US-led SWIFT payments network, which also meant these businesses could no longer deal in US dollars — the commonly accepted medium of international exchange.
With India’s oil and non-oil imports from Russia jumping since the start of the war, the issue of how we pay for them has been at the forefront ever since.
The fact that India does not export nearly enough to Russia meant the rupee soon became an unviable currency to pay for imports — Russia was accumulating rupees and had nowhere to spend them.
In May, ThePrint reported that India was using UAE dirhams in addition to rupees to pay for Russian imports.
At the time, Denis Valentinovich Manturov, Russia’s deputy Prime Minister and Minister for Industry & Trade had said that “because of a lack of imports from India, it’s not enough to use the rupee”.
According to the latest government data available, India’s crude oil imports from Russia jumped to around $30 billion in the January-August 2023 period from $9 billion in the same period in 2022, which itself was magnitudes higher than pre-war levels.
At the same time, India’s non-crude oil imports have also jumped to $11.3 billion from about $8 billion over the same period.
In comparison, India exported just $2.6 billion worth of goods to Russia in the first eight months of 2023.
In July, ThePrint reported that India — despite its own resistance — was paying for 10 percent of its imports from Russia using the Chinese currency yuan.
While rupee payments and, to an extent, dirham payments to Russia are continuing, the Indian government has pushed back against the use of the yuan, which has meant an increasing amount of rupees are getting “trapped” in Russia.
In September, Russian Foreign Minister Sergei Lavrov said that the Indian government had told him that it would “propose promising areas they (the rupees) can be invested in”, adding that “our governments are talking how to use and invest them to mutual benefit”.
A senior official in the finance ministry told ThePrint that the Indian and Russian governments were looking at various options to address the accumulation of rupees with Russia, including investment proposals.
“We are looking at various ways in which to help the Russian entities to use their surplus rupees,” the official told ThePrint on the condition of anonymity. “One way is for them to invest in business deals and infrastructure, another is to invest in government securities.”
“The third is to work out a way that they can pay for our exports directly in rupees [instead of dollars or any other currency], but we are facing some roadblocks in that,” the official added. “We are working with them to iron these out.”
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Business deals and infra projects
The Russian media in late October reported that India’s public sector shipbuilding company Goa Shipyard Limited had entered into a deal to construct 24 cargo ships for Russian entities.
ThePrint has confirmed this development with Goa Shipyard, with officials in the company saying that the contours of the deal were acceptable to all parties concerned and that the “final black and white contract” will be signed in a month’s time. They said they would be able to comment officially only once the contract has been signed.
Such business deals are one of the solutions to the excess rupee problem the Indian government is trying to work out with the Russian government, but this one deal isn’t nearly enough, according to Swasti Rao, associate fellow at the Europe and Eurasia Center, Manohar Parrikar Institute for Defence Studies and Analyses.
“I feel steps like these should have been taken long back, but perhaps Russia wants to focus its money on the war it’s fighting,” Rao told ThePrint.
“So, such a deal is of course in the right direction and sets a precedent for other such business deals where Russia can use its surplus rupees, but this deal in itself is not a game-changer,” she said.
“Many more such deals will have to happen before there can be an impact on the quantum of rupees trapped with Russia,” she added.
Indeed, some other projects are in the works, with Union Minister of Ports, Shipping & Waterways Sarbananda Sonowal in September meeting the Russian Minister for the Development of the Far East and the Arctic A.O. Chekunkov.
Among other things, the two ministers discussed ways to hasten the construction of the Eastern Maritime Corridor that would connect Chennai to Vladivostok in Russia, according to an official press release by the government.
“This project would be another big way in which the rupees held by Russia can be used,” the finance ministry official told ThePrint.
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Easing investments in govt securities
Another step India took last month was to ease the regulations regarding investments in government securities and treasury bills by people residing outside India.
On 16 October, the Reserve Bank of India (RBI) notified an amendment to the Foreign Exchange Management (Debt Instruments) Regulations, 2019, through which it added a provision that said: “Persons resident outside India that maintain a rupee account… may purchase or sell dated Government Securities/treasury bills, as per terms and conditions specified by the Reserve Bank.”
Government securities are instruments issued by the central or state governments through which they borrow money from the public and from companies. Treasury bills refer to short-term securities with a maturity period of less than a year, while dated securities refer to longer-term ones.
The official in the finance ministry explained that, earlier, if entities not resident in India wanted to invest in government securities, they had to register as foreign portfolio investors (FPIs).
“Now, with the RBI notification, they no longer have to register as FPIs, which has made it easier for them to use their surplus rupees,” the official said.
However, here too, Rao questioned the efficacy of such a move.
“Allowing other countries, including Russia, to invest in government securities and treasury bills is a good way of making use of the rupees lying in Russia’s accounts that Russia cannot use elsewhere,” she said.
“But it remains to be seen how attractive these low-yield securities will be for the Russians who want to also keep their money liquid to be used during the war,” Rao added.
A second senior official in the finance ministry told ThePrint that, while the government was not particularly worried about deteriorating trade relations with Russia over the issue of rupee payments, some Russian exporters were getting impatient.
“India and Russia’s economic relations go way back,” the official explained.
“Where the government can exert direct influence, the companies are willing to even take IOUs instead of payments in rupees right now. There is trust that these payments will be made.”
“But there are private companies in Russia that need the income from their exports to continue doing business,” the official added. “They are not at all satisfied with rupee payments and that’s the segment that is risky.”
(Edited by Richa Mishra)
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