India and Russia Suspend Effort to Use Rupees Instead of Dollars for Bilateral Trade

Indian rupee banknotes arranged for a photograph at a general store in Mumbai, India, on W
Dhiraj Singh/Bloomberg via Getty Images

India and Russia suspended talks on Thursday about using the Indian rupee as currency to settle their bilateral trade, greatly disappointing Indian importers who wanted Russia to embrace their national currency but reassuring Americans worried about the dollar losing its coveted position as the standard medium of international trade.

Reuters reported that Russia scuttled the negotiations because it felt most of the advantages would accrue to India:

With a high trade gap in favor of Russia, Moscow believes it will end up with an annual rupee surplus of over $40 billion if such a mechanism is worked out and feels rupee accumulation is ‘not desirable’, an Indian government official, who did not want to be named, told Reuters.

India’s finance ministry, the central Reserve Bank of India and Russian authorities did not immediately respond to requests for comment.

The rupee is not fully convertible. India’s share of global exports of goods also is just about 2% and these factors reduce the necessity for other countries to hold rupees.

“We don’t want to push rupee settlement any more, that mechanism is just not working. India has tried everything we could to try and make this work but it hasn’t helped,” an Indian official said, confessing that Russia is interested in dethroning the dollar but wants to replace it with the Chinese yuan, a more plausible candidate for the new global currency than Russia’s ruble.

Bloomberg News saw the handwriting on the wall in February, arguing that “India’s love for discounted Russian oil” would make the trade deficit so immense that Russia would be foolish to accept rupees as payment:

New Delhi’s imports from Russia in eight months to November were almost 16 times its shipments to the nation, trade ministry data show. Russia’s war with Ukraine, which invited US-led sanctions, germinated the idea of rupee trade as India boosted its purchases of cheap oil from Moscow to contain a rising import bill amid high commodity prices. The mechanism worked as a template to draw out similar arrangements with other nations such as Mauritius and Sri Lanka.

Slow progress in the rupee trade with Russia could add to pressure on the local currency which slipped the most against the dollar among emerging Asian currencies in the past 12 months. India is betting on internationalization of the rupee to reduce dollar demand and make its economy less vulnerable to global shocks after the current account deficit, the broadest measure of trade in goods and services, widened to a record in July-September.

Not a single trade between the two countries is known to have been settled with rupees, despite the Reserve Bank of India’s announcement of a mechanism for doing so in July. Russia accepts rupees only for “payments for import of defense equipment.” When Russia and India squabbled over buying munitions with rupees last year, arms shipments ground to a halt.

As for trading in rubles, Indian importers balk at using the Russian currency due to highly variable exchange rates and the looming danger of falling under Western sanctions against Russia due to its invasion of Ukraine. Indian oil buyers have apparently settled on using the United Arab Emirates (UAE) dirham to pay for Russian products — a currency that is pegged to the U.S. dollar.

Bloomberg noted that Indian imports from Russia jumped by 400 percent after the invasion of Ukraine began, and discounted Russian oil was suddenly available for purchase in huge quantities, while India’s exports to Russia actually fell by 14 percent in the same period.

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