Bye-Bye Dollar: India Is Mulling Direct Rupee-Ruble Payments System For Trade With Russia – Jerri-Lynn Scofield

India is discussing how to set up a rupee-ruble payment mechanism to enable it to trade with Russia, to circumvent the U.S. sanctions regime.

India abstained from voting on the March United Nations (UN) General Assembly Resolution demanding an end to Russian offensive in Ukraine (General Assembly resolution demands end to Russian offensive in Ukraine).

Since its Independence, India has tried to steer a neutral course between the U.S. and Russia (and previously, the USSR). During the 1950s, India’s first prime minister, Jawaharlal Nehru, was a prime architect behind the Non-Aligned Movement, under which developing countries tried to pursue their national interests without binding themselves to either the U.S. or Soviet bloc.  India, Indonesia, and Yugoslavia were mainstays of that movement, which today includes 120 member states, 18 observer states, and 10 international organisations.

Following the collapse of the Soviet Union, India developed closer relations with the United States. Most recently, under prime minister Narendra Modi, India’s policy tilted even more decisively in a pro-U.S. direction. Modi and Trump shared a strong affinity, and Modi even travelled to the U.S, to host massive rallies intended to galvanize Indian Americans in support of Trump. See this BBC account for further details, What did the Trump-Modi ‘bromance’ achieve?

During the last several months, several considerations have prompted the Modi government to rethink the wisdom of putting all its eggs in the U.S. basket. Instead, India is returning to a more balanced approach, assessing its national interests vis-a-vis those of other countries and acting accordingly.

Two developments this summer caused India to question the reliability and integrity of the U.S. as an ally.

The first was the manner of the U.S. pullout from Afghanistan, which had External Affairs Minister S. Jaishankar wondering about the value of U.S. security guarantees. Washington’s Ukraine policy is only increasing those misgivings. The United States was willing to push Ukraine to take actions that many – including Henry Kissinger, George Kennan, and Noam Chomsky – warned Russia couldn’t abide. But then when the shooting started, the United States wasn’t willing to get in line of fire.

And in the second, in September, the U.S. stunned many when it announced a new Australia/United Kingdom/United States security grouping (AUKUS), as part of which Australia would receive American nuclear submarines. Prior to the new arrangement, the Quad –comprised of the U.S., Australia, India, and Japan – was the principal counterweight to China in the Indo-Pacific (see this Council on Foreign Relations summary, The Quad in the Indo-Pacific: What to Know).

This AUKUS announcement caused consternation both in France and India. Australia cancelled a $37 billion deal with a French company to supply diesel -powered submarines, prompting French foreign minister Jean-Yves Le Drian, according to the BBC,  Aukus: French minister condemns US and Australia ‘lies’ over security pact to accuse the three countries of “duplicity, a major breach of trust and contempt”..” The United States has consistently told India that it couldn’t share sensitive nuclear submarine technology, according to the South China Morning Post, Aukus fallout: for years, US told India it couldn’t share nuclear submarine technology. ‘And now this …’). In the wake of the AUKUS development, France and India have strengthened their bilateral ties, with more of the same expected.

Another reason India must tread carefully arises from its past military procurement policy. Since the early 1970s, India has purchased much of its armaments from Russia. Although as part of its tilt towards Washington, India has in recent yearsdecreased its reliance on Russian arms, “Today, 60% of India’s military hardware inventory is from Russia or the former Soviet Union and the bulk of India’s license-based defense manufacturing comes from Russia,” according to Defense News, India braces for sanctions on Russia to delay weapons programs, deliveries. This makes India dependent on Russia for the supply of spare parts. Shunning Russia would mean India must find new sources of armaments.

The realization of the shakiness of U.S security guarantees means that India is rethinking the state of its relations with China. Although the two countries have gone to war since Independence, their bilateral relationship has not always been hostile. Now that the value of U.S. security guarantees is being more openly questioned, one option for India is to try and ensure that its bilateral relations with China don’t deteriorate to the point of outright hostility again. That the two countries are becoming more closely bound is true, at least on the economic level, with the latest bilateral trade figures showing imports from China increasing by 30% over 2019 (to $97.5 billion) and exports climbing by 30% over 2019 (to 28.1billion). according to The Hindu, India-China trade crossed $125 bn in 2021.

China (1.4 billion) and India (1.38 billion) together account  for more than a quarter of the world’s 7.9 billion people, so anything that dials down bilateral tensions is to be encouraged.

To Be Non-Aligned on Russia Policy Implies India Finding Trade Workaround

The U.S. led economic sanctions regime against Russia is inevitably porous to some degree. Not all Russian banks have been excluded from SWIFT. Crimping Russia’s ability to spend dollars doesn’t shut off its ability to trade with willing partners. India appears to be one such partner. Despite loud squawking in the U.S. Congress about its failure to support the UN Russia resolution, India appears to be banking that the Biden administration won’t impose sanctions on India (for more on that sound and fury, see this Times of  India account, Biden officials bat for India amid criticism of New Delhi’s stand on Russia-Ukraine spat).

The bilateral relationship between the United States and India the two countries has changed significantly since the 1960s, when then-prime minister Indira Gandhi was forced to muzzle her criticisms of U.S. bombing of Hanoi and Haiphong in order to secure necessary U.S. food grains after a savage drought. Per the Indian Express,  Swallowing the humiliation:

Many of us still have hurtful memories of the mid-’60s when, after two successive years of savage drought, India desperately needed American wheat under the US Public Law 480 on rupee payment — and at relatively low prices because the country had no foreign exchange to buy food in the world market. Indira Gandhi had just become prime minister and chose to go to Washington on an official visit. Lyndon Johnson gave her a gushing welcome and responded to the food problem confronting her effusively, promising as many as 10 million tons of PL480 wheat. However, at an early stage the transaction turned sour.

Infuriated by India’s criticism of American bombings of Hanoi and Haiphong in the course of the Vietnam War, the irascible Texan put food shipments on such a tight leash that India literally lived from ship to mouth. With every morsel we swallowed a little humiliation. When told that the Indians were saying exactly the same thing as the UN Secretary-General and the Pope were, Johnson had retorted: “The Pope and the Secretary-General do not need our wheat.” Many in India started demanding that we should say no to American wheat. Sensibly, Indira Gandhi said nothing. Privately, she told some confidants: “If food imports stop, these ladies and gentlemen won’t suffer. Only the poor would starve.”

Back to the present. Permit me to quote extensively from this Hindustan Times account,  Panel to scrutinise impact of Russia sanctions on India’s economy:

A top interministerial panel has been formed to scrutinise a barrage of economic sanctions imposed by the West on Russia following its invasion of Ukraine and their likely impacts on India’s economy, an official familiar with the development said.

As the Ukraine conflict deepens, India has stepped up efforts to secure critical imports from Russia, particularly potassium chloride (popularly known as muriate of potash), a key fertiliser, and sunflower (edible) oil.

Led by economic affairs secretary Ajay Seth, the high-level panel also includes top bureaucrats of the ministries of food and consumer affairs, fertilisers, commerce, external affairs, agriculture and petroleum.

The panel is scouring for avenues to set up a rupee-ruble bilateral payment system to escape a wave of unprecedented sanctions on Russia, which have crippled the former Soviet state’s financial system.

“Official talks with Russians will be needed to set up an alternative payment mechanism but the government will be given various options after a comprehensive review of the sanctions,” the official cited above said, requesting anonymity.

India fears disruption to supplies of murate of potash ahead of its main summer-sown kharif season could hobble its farm sector, which is a major source of income for half of the country’s population.

The war has caused oil prices to skyrocket and the rupee has hit a record low. Note that India still has a number of state-owned backs that could be used to implement any arrangements that might be devised. A private bank might be vulnerable to sanctions. Per the Hindustan Times:

The Russia-Ukraine conflict has already begun hurting Asia’s third-largest economy, which had only started to revive after a pandemic-induced recession in 2020-21. On Monday, the rupee sunk to a record low to 76.9, falling 1% against the dollar as oil prices soared.

At least $400 million of payments and receivables by Indian exporters to Russia are now stranded because the sanctions have cut off Russia’s ability to transact in dollars, the currency for international payments. Russian banks have been severed from a global payments highway known as SWIFT.

The panel has representatives from the Reserve Bank of India, which is looking to designate a smaller Indian bank with minimal exposure to dollar or euro transactions, where a Russian bank could open an account because the sanctions don’t prohibit a rupee-ruble exchange system, the official said.

India had successfully used a similar payment system to pay for oil imports from Iran when that country faced sanctions from the West. At that time, the UCO Bank was set up as the main payment gateway.

An alternate mechanism for payments, however, is not easy to set up. While the idea is that a Russian bank will set up a so-called “vostro account” in an Indian bank and both countries will deposit a certain amount to guarantee for payments to importers and exporters, determining the rupee-ruble exchange rate will be a key challenge.

“One reason is that even if a rupee-ruble exchange rate is pegged to the dollar for determining a notional exchange rate, we must keep in mind that the value of ruble is continuously sliding vis-a-vis the dollar,” said Amarendra Patil, a trade economist who formerly taught at the Indian Institute of Foreign Trade.

“This could make the payment system ineffective because of continuous erosion of one of the two currencies (ruble),” he added.

There is urgency to agree viable arrangements, as planting season is – or will soon be – underway, and farmers need fertiliser. Per The Hindustan Times:

The government, which last week reviewed stocks of fertilisers, is scouting for alternative suppliers to fill the fertiliser gap at prices similar to those charged by Russians.

According to official data, 11-11.5% of total imports of edible oils and fertilisers are sourced from Russia-Ukraine region. The two countries also account for over 90% of sunflower oil imports. Within a basket of fertilisers India imports, Russia accounts for over 17% of MOP (muriate of potash) and 60% of NPK (nitrogen, phosphorus and potassium).

“In response, the government is identifying alternate supply sources for both edible oils and fertiliser, although these will be expensive,” said Sonal Varma, an analyst with Nomura Holdings, a global financial advisory and securities firm, in a research note.

There are of course precedents for similar arrangements. In fact, India and the USSR set up one such arrangement during the 1950s, according to
S Murlidharan writing in Northlines, Crisis as an opportunity: Rupee-Rouble trade should become template to break US hegemony:

The rupee-rouble exchange is not new. In 1953 Indo-Soviet trade agreement contemplated all payments in settlement of imports and exports between the two nations being made in INR. But this arrangement was dropped in 2005 when it resulted in Russia being saddled with enormous quantity of INR what with India being the net importer. However, the two nations once again embraced rupee payment for Russian export of S-400 Triumf air defence system in 2019 with the deal being for US 5.2 to 5,6 billion to escape sanctions by the US under its Countering America’s Adversaries Through Sanctions Act (CAATSA). INR-Rial agreement with Iran similarly was to escape the American ire but had to be abandoned when the Trump administration extended the bar on its currency being used to a complete bar on import of oil itself from the Gulf nation.

The two governments are keen on INR-Rouble trade and the nuts and bolts of the arrangement would be announced soon hopefully. Indian exporters are in a quandary with Rouble testing new low every day. How to fix the price is the issue. Trade cannot come to a screeching halt. Russia’s deputy chief of mission Roman Babushkin was quoted in news report three years ago saying that there had been a five-fold increase in payments in national currencies from about 6 percent to over 30 percent now. There should be no let up in this healthy trend except that war has queered the pitch with steep devaluation of the Rouble; thus calling for negotiations in a spirit of give and take to neutralise partially Russian currency’s devaluation on the back of war and the Western boycott.

By institutionalizing INR-Rouble trade we would be sending a strong signal that the US dollar need not be invincible and unavoidable in international trade and payments. If more and more such agreements are signed between nation states, the world could well one day break free at least partially from the vice-like grip of the greenback on fortunes of other nations.

The Indo-Russian initiative should by no means be construed as acquiescence by India in the Russian expansionism and condonation of its warmongering. Rather it should be seen as pursuit of enlightened self-interest, both short-term and long-term.

Within India, there’s broad political support for pulling away from Modi’s previous policy of tightening ties with the U.S. The strongest criticisms – actually, denunciations – of U.S. policy I’ve seen in any mainstream English language television broadcasts are coming from India’s Republic TV.  I’ve found myself tuning in each evening to the nightly debates refereed by BJP mouthpiece Arnab Goswami.  Refereed is the right word, as these debates generate lots of shouting. An appearance on Arnab Live is not for the faint-hearted – nor, for that matter, is watching these slugfests. Goswami intervenes actively in the debate; he minces no words. And rest assured, he wouldn’t say anything that’s not consistent with the general contours of current Modi policy. If you’d told me a year ago that I would find myself tuning into a nightly Goswami broadcast, I would have told you you were mad.

But, here we are.

*  *  *

Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

By Jerri-Lynn Scofield via NakedCapitalism.com

Leave a Reply