India is examining Russia’s proposal of putting in place a rupee-denominated payment mechanism for carrying out bilateral trade that will help in navigating Western sanctions, while simultaneously circumvent the cumbersome process of fixing exchange rates between the rupee and the rouble.

“To make the rupee-denominated mechanism work, Russia is ready to increase its imports from India to match its exports and wants to buy a variety of items including more of food grain, pharmaceuticals, textiles, toiletries and a whole lot of other essentials,” a surce tracking the development told BusinessLine.

Per the proposal, India will be required to pay for all its imports from Russia, which mostly includes weapon systems and other defence equipment apart from items such as plastic, chemicals, oil and machinery, in rupees. In turn, Russia will use the rupee payments to pay for items it imports from India.

Bilateral trade

If the proposed system works well, India could also use it to source more oil from Russia, which is being offered at a discount, but it is still a call to be taken at the highest level, the source added.

“A team from Russia’s central bank is scheduled to visit India in May to thrash out the details of the proposal,” the source said.

One impediment to be taken care of is that the bilateral trade, at present, is heavily skewed in Russia’s favour. Of the total annual trade of around $11 billion, Russia’s exports to India are around $9 billion, while its imports are around $2 billion. There is a $7-billion deficit which Russia wants to bridge by increasing imports.

“Because of the Western sanctions against Russia, the country is mostly importing just from China. So, there is a lot of scope for it to source items from India,” the source explained.

But for the payment mechanism to work, RBI will still need to enable it. That decision has not yet been taken.

During his recent visit to India, Russian Foreign Minister Sergey Lavrov had said that India and Russia would find a way to bypass the ‘artificial impediments’ created by the West in the payment system.

On the use of rupee and rouble in bilateral trade, the Minister said that Russia had started moving away from the use of US dollar to using national currencies more and more some time back, and that trend would be intensified.

Options available

Carrying out rupee-denominated trade will also solve the big problem of fixing the exchange value between the rupee and the rouble that is especially difficult now due to the volatility of the latter, the source said.

Following Russia’s invasion of Ukraine on February 24, seven Russian banks were banned from using the SWIFT messaging system that effectively stopped them from participating in international trade.

To make the system work, Russian banks that are exempted from the West’s sanctions will need to open branches in India. Of the two Russian banks with branches in India, VTB bank is under sanctions but Sberbank is not.

“While business can be carried out with Sberbank, India would need more than one channel. So banks that are not under sanction, such as Gazprom Bank that does business in oil and gas, could be allowed. That’s another decision that needs to be taken,” the official said.

The Indian banks involved in the transaction also need to be identified. The UCO bank, that does not have dollar exposure, is an obvious choice. But there may be need to involve more banks. “Once the meeting between Russian and Indian officials takes place next month, there will be more clarity on the matter,” the source said.