Sanctions-hit Russia may have to invest much of its fast-accumulating rupee reserves — estimated at over $2 billion and continuously growing — in government securities and infrastructure and other projects in India, as it is now running out of options of taking money out of the country, sources tracking the matter have said.

India has rejected a proposal supported by Russia to allow Iran to import Indian goods and pay for it using Russia’s rupee reserves because of the diplomatic risks attached to it, the source said. Moreover, the dirham route to take the rupee reserves out is also now mostly blocked due to increased Western scrutiny of UAE banks following the Financial Action Task Force’s ‘grey-listing’.

“Moscow is in a bind as it is finding it increasingly difficult to take out the accumulated reserves out of India and is also not able to use it up to pay for imports since it is not buying more from India due to quality issues. It has to now get used to the idea of investing more in government securities and the Indian equity market, which it has been mostly avoiding,” an official source told businessline.

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While Iran was ready to buy Indian goods using Russian money, and then settling its account separately with the Putin government by supplying its items, for instance, aircraft spares, New Delhi rejected it. “It would not be a diplomatically wise move especially due to allegations that Iranian drones are being used by Russia in its Ukraine war,” the source said.

At the moment, most of the rupee reserves are only on account of defence procurement and sales as India had been purchasing Russian oil using hard currencies (since the price was below the price cap fixed by Western nations), senior officials in the Commerce Ministry had noted recently.

With India continuing to actively source weapons and military equipment from Russia (about $10 billion worth of orders placed per Russian news agencies), the rupee reserves are going to go up steadily. In case it needs to start paying for oil in rupees (Russia is now the largest oil supplier to India), then the balances will skyrocket.

“It is very clear that Russia will now need to invest its accumulated rupee reserves in Indian government securities and infrastructure projects. Russian companies may even consider setting up operations in India and produce items as per their quality specifications. There will be more conversations between the two governments on this,” the official said.

The Special Rupee Vostro Accounts, that have been opened by Russian banks in India, at present, do not have much rupee reserves, but the situation may change soon, the source added. “While things are yet to hot up, transactions have started happening.”

In July 2022, the RBI allowed international trade in rupees, creating the possibility of doing business with Russia in rupees and, in the process, bypassing the sanctions imposed by the West on Moscow (including on defence deals) due to its attack on Ukraine.

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