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14th April 2022 (6 Topics)

India considering to review ‘Rupee-Rouble mechanism’


As the West imposes harsher sanctions on Russia in a bid to stop its invasion of Ukraine, India, one of Russia’s trade partners has been under pressure to reduce its oil imports, defence imports.


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

Need of Reviving Rupee-Rouble Mechanism:

  • Over 40 U.S. and European allies have imposed economic sanctions against Russian banks and entities amid the war in Ukraine.
  • As per Bloomberg, Indian exporters are awaiting payments of about $500 million that have been delayed amid the sanctions.
  • According to the Department of Commerce, India currently has imports worth Rs. 64,623 crore from Russia in 2021-22.
  • Moreover, India’s exports to Russia are worth Rs 23,658 crores in 2021-22.
  • In total, India-Russia trade is worth Rs 68.98 lakh crores — a mere 1.28% share of India’s trade figures.
  • India’s trade deficit with Russia amounts to Rs 12.83 lakh crores, which include crude oil, defense trade.

India’s imports of oil and defence equipment

  • India being a net importer of Russian goods has currently increased its import of Russian crude oil amid falling oil prices.
  • According to Reuters, India bought at least 13 million barrels of Russian oil since the Ukraine war began, a steep rise from last year, when India bought 16 million barrels of Russian oil in all of 2021.
  • Moreover, India is also awaiting the timely delivery of the S-400 air defence systems under a deal signed in 2018.
  • The deal worth $5.43 billion faces looming U.S. sanctions under CAATSA (Countering America’s Adversaries through Sanctions Act.

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