By Chris Devonshire-Ellis

Extra efforts are required by Indian banks and companies dealing with Russia to fully utilize the potential of the Rupee-Ruble payment settlement mechanism, Moscow’s envoy to New Delhi, Denis Alipov, said on Monday (November 20).

The Problem

Discussing trade between the two countries – which has increased significantly in the past year and a half, hitting an all-time high of over US$43.8 billion in the first eight months of 2023 – Alipov noted that payment problems still hinder trade.

“Some extra efforts are needed by companies and banks to explore” how they can work with the mechanism involving the national currencies, he said. The diplomat stressed the need for Indian banks and exporters to resolve the issue, and said the payment mechanism requires fine-tuning – adding that Indian banks are willing to cooperate.

Moscow and New Delhi established the framework to settle transactions last year, after bilateral trade was hampered by US-led sanctions on Russia, which impacted critical supplies from Russia to India, including defense items such as S-400 Triumph air defense systems, fertilizers, minerals, and other goods.

Russian and Indian officials have said, however, that the Rupee-Ruble settlement mechanism failed to gain traction as anticipated, mainly due to a trade imbalance. As New Delhi ramped up oil purchases from Russia, Moscow quickly amassed a surplus of over US$40 billion due in special Vostro accounts in which Indian banks hold money for Russian banks in their domestic currency.

In September, Russian Foreign Minister Sergey Lavrov announced that he had discussed the issue with his Indian counterpart. “In the current situation, Russia has billions of rupees accumulated in the accounts of Indian banks, and we are discussing how they can be used. And our Indian friends have conveyed that they will suggest the promising areas where these funds can be used as investments,” he said at a press conference in New Delhi. Lavrov added that bilateral agreements with India, including in the defense sector, are progressing as planned despite the difficulties related to payments caused by the sanctions.

Russia as a BRI-Style Asian Investor

The payment difficulty means that Indian payments for Russian energy are accumulating in Russian-owned Vostro accounts in Indian rupees. Getting those out of those accounts and back into Russia is proving somewhat difficult as the Indian Rupee is not a widely used international currency – Russia is finding it hard to dispose of them, and US$40 billion is a lot of money.

This is also an issue for India as Russia cannot continue to supply oil and gas and other commodities only to be effectively denied from using the proceeds. This is also holding up bilateral trade development, and could potentially reduce the amount of energy resources that India also needs to sustain its own industrial progress if a solution cannot be found.

The discussions appeared to mention ‘investments’ which could mean that Indian Government money owed to Russia could be re-routed into equity into selected Indian SOEs. That raises the interesting possibility for a new tranche of Russian equity financing Indian infrastructure development, with the prospect of receiving a return on that at a later stage, either through dividends or IPO.

That would, in effect, recreate Russia as a lender to Asian regional infrastructure projects in much the same way that China is doing with its Belt and Road Initiative. The main question here is whether such a solution is acceptable to Russia as it still does not resolve the issues of repatriating capital back to the Russian domestic economy.

Other solutions could involve Mauritius. The country has a Free Trade Agreement with India, and in turn is part of the African Continental Free Trade Agreement (AfCFTA). Should Russia do the same and agree a trade deal with Mauritius, then it would be possible for Russia to use its excess Indian revenues to finance developments in Africa.

India also has a CEPA agreement with the UAE, and Rupee-Dirham currency exchanges are also being established. That could be utilised to allow Russian money in Indian Vostro accounts to be used to invest in the UAE and the Gulf Cooperation Council (GCC) countries.

The repositioning of Russian equity as investment capital in line with China’s BRI model is an interesting one and dependent partially on how much need there is for Moscow to have its US$40 billion (and growing) worth of rupees repatriated back to Russia.

An alternative is for it to be re-invested and returned by alternative mechanisms involving third party countries in Africa and the Middle East as investment platforms. Balancing Russian capital in India against its domestic and foreign investment needs is an interesting juggling act and could see Russia become a more significant global south investor.

Chris Devonshire-Ellis is the Founder of Dezan Shira & Associates and Chairman of the firms International Board of Equity Partners & Directors; and is the Managing Director of Asia Briefing publications.

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