16th July 2024 (11 Topics)

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India and Russia have doubled rupee-rouble payments in 2024

Context

India and Russia have doubled their payments in national currencies (rupee-rouble) since last year despite sanctions by the U.S. and European Union, says Russia’s state-controlled and largest bank, Sberbank, which handles a majority of payments for Indian exports to Russia.

Key Highlights

Increase in Transactions: According to Sberbank, the volume of payments processed from January to June 2024 doubled compared to the same period in 2023. The number of transactions increased by 80% in the first half of 2024.
Rupee Deposits: Indian corporates' rupee deposits have increased sixfold in 2024, reflecting growing trust in the rupee.
Economic Cooperation: The surge in rupee-rouble transactions is expected to rise further after Prime Minister Narendra Modi’s visit to Moscow, which aimed to strengthen economic cooperation between the two nations.

What is the Rupee-Rouble mechanism?

The Rupee-Rouble trade arrangement is an alternative payment mechanism to settle dues in rupees instead of Dollars or Euros.
The idea was first conceived in 1953 under the Indo-Soviet trade agreement.
Under Article VI of the Indo-Soviet agreement:
- All payments between India and the then Soviet Republic USSR may be made in Indian Rupees.
- For this purpose the State Bank of the U.S.S.R. will maintain one or more accounts with one or more commercial banks in India authorised to deal in foreign exchange.
  - In addition, the State Bank of the USSR will, if that Bank considers necessary, maintain another account with the Reserve Bank of India.
- All commercial transactions to be financed in Rupees will take place through the commercial bank accounts while the account with the Reserve Bank of India will be used only for replenishing the balances with the commercial banks when necessary
- Payments made to and by Indian residents and USSR residents will be done only in those specified accounts by debiting/crediting.
- The accounts will be replenished by
  - by transfer of funds from another account of the State Bank of the USSR with another commercial bank or with the Reserve Bank of India; or
  - by the sale of Sterling to the bank concerned
The payments covered:
- Commercial transactions and covering insurance, freight, port charges, storage and forwarding expenses and bunkering
- Distribution of films
- Technical assistance
- Tours of commercial or cultural nature
- Maintenance of Embassy of India in the USSR and of the Embassy and the Trade Representation of the U.S.S.R. in India
- Other non-commercial payments agreed between Reserve Bank of India and the State Bank of the USSR

Reasons Behind the Surge

Sanctions and Opportunities: The sanctions imposed on Russia by the U.S. and the EU have created opportunities for Indian businesses. The exit of Western companies from the Russian market has left a vacuum that Indian businesses can fill.
Enhanced Trust in Rupee: Sberbank reported an increase in trust towards the rupee among its clients, with rupee-denominated accounts and deposits becoming more prevalent.
Strategic Visits and Agreements: Prime Minister Modi's visit to Moscow and the $100 billion trade target set for 2030 with Russian President Vladimir Putin have boosted confidence in bilateral trade.

Impact of the Increased Payments

Trade Balance and Growth: The doubling of rupee-rouble payments is expected to contribute to a more balanced and substantial trade relationship between India and Russia.
Sectoral Opportunities: Sectors such as auto and aviation components, chemicals, microelectronics, consumer electronics, machinery, medical devices, and agricultural products are highlighted as potential areas for Indian exports to Russia.
Competitive Edge: Indian businesses have the potential to gain a competitive edge in the Russian market, which is currently being dominated by Chinese products.

Required Measures

Government Support: The Indian government must provide robust support to businesses venturing into the Russian market, including secure payment mechanisms, insurance, and logistics.
Filling Market Vacuums: Indian businesses should capitalize on the opportunities created by sanctions and fill the market vacuums with Indian products.
Strategic Alliances: Strengthening strategic alliances and enhancing cooperation in key sectors will be crucial for achieving the trade targets and sustaining growth.

Mains Practice Question

Q: Discuss the significance of rupee-rouble payments in enhancing India-Russia trade relations in the context of current geopolitical challenges.

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India and Russia have doubled rupee-rouble payments in 2024

Key Highlights

What is the Rupee-Rouble mechanism?

Reasons Behind the Surge

Impact of the Increased Payments

Required Measures

Mains Practice Question

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