Russia on Friday admitted that its huge accumulation of Indian rupee has become “a problem”. However, it said that discussions are on on how to use the currency.

“As for the rupee, this a problem. We accumulated billion of rupees in Indian bank accounts but to use this money it needs to be transferred to another currency and this is being discussed now,” Russian Foreign Minister Sergey Lavrov told reporters on the sidelines of a meeting of the Council of Foreign Ministers of the Shanghai Cooperation Organisation (SCO) in Goa.

His remarks came a day after news agency Reuters reported, quoting two unnamed Indian government officials, that India and Russia have suspended efforts to settle bilateral trade in rupees, after months of negotiations failed to convince Moscow to keep rupees in its coffers. However, later, both the countries denied the report.

Settlement mechanism

India began exploring a rupee settlement mechanism with Russia shortly after the invasion of Ukraine in February last year. However, most trade continues to be conducted in dollars. Although India and Russia have discussed the possibility of facilitating trade in local currencies, no formal guidelines have been established.

India‘s imports from Russia have increased from $10.6 billion to $51.3 billion since Russia‘s invasion of Ukraine. Discounted oil has made up a significant portion of India‘s imports, which reached a record 1.68 million barrels a day in April, up six fold from a year earlier, according to Vortexa Ltd, a data intelligence firm. Meanwhile, India‘s exports to Russia slightly declined from $3.61 billion to $3.43 billion.

The rupee is not fully convertible. India‘s share of global exports of goods also is just about 2 per cent and these factors reduce the necessity for other countries to hold rupees. While most trade is in dollars, t other currencies like the UAE dirham are increasingly being used.

The two sides have spoken about facilitating trade in local currencies but the guidelines were not formalised. The Kremlin initially encouraged India to trade in national currencies following sanctions on Russian banks and a ban on transactions using the SWIFT messaging system. But volatility in the rouble soon after the war began meant plans for a rupee-rouble mechanism for oil imports were abandoned. India has resisted pressure from the US to scale back relations with Moscow since the invasion of Ukraine.