Russia’s Accumulation of Indian Rupees: The Trade Imbalance and Proposed Solutions

Economy

Russia is forced to accumulate up to $1 billion per month in assets in Indian rupees abroad, due to the unbalanced trade relationship with India, which is inflating the stock of capital outside its territory since the invasion of Ukraine.

This comes after Russia emerged as a major supplier of oil to India over the past year, taking the largest share of trade in national currencies, after Moscow redirected oil shipments to the east as traditional customers in Europe avoided purchases after the war began more than a year ago.

But as imports from India stagnate, Russia ends up with surplus rupees, which its companies have difficulty bringing home because of local currency restrictions. While the stalemate regarding the solution led to Russia expecting to increase the surplus further, according to what Bloomberg quoted from sources, and Al Arabiya.net viewed it.

Every 3 months, the trade imbalance likely generates the equivalent of $2 billion to $3 billion that Russia cannot use, according to Bloomberg. This amount would add to an estimated $147 billion in net foreign assets created abroad over the course of 2022.

For her part, a member of the Presidium of the Association of Exporters and Importers in Russia, Irina Zasdatel, said that the reason is a sharp increase in the volume of oil supplies from Russia. “On the back of higher oil sales growth, there is little sign of expansion in the supply of other commodities.

The stalemate at the negotiating table between India and Russia complicates the flourishing of one-way trade between them. In the first quarter, India had a trade deficit of $14.7 billion with Russia.

One of India’s highest priorities is to promote wider use of the rupee in international transactions. The central bank suggested that countries that accumulate surplus rupees from exports can invest the money in domestic securities including government bonds.

While the two countries discuss various payment mechanisms including investments in Indian capital markets by Russian entities.

It was an option that initially fell short with Moscow, but is now back on the table with billions of rupees piling up in Indian banks, officials in India familiar with the details said. Other possibilities include transferring accumulated rupees to Indian infrastructure projects in exchange for equity stakes.

For Russia, the only acceptable option is to use third-country currencies, such as the Chinese yuan or the UAE dirham, said people familiar with the deliberations. They said a deal is a long way off because Russia has limited leverage in a situation with few alternative buyers for India.

In turn, Russian economist Alexander Isakov said: “Russia’s trade with India is increasingly unbalanced. India’s exports to Russia have not kept pace with the boom in imports, but there is limited desire in Russia to salvage the current account surplus in rupees. However, there are no alternative oil importers of India’s size. On the horizon for Russia, so gradually exporters and banks will accept settlement in rupees.” This would allow Russia to keep oil flowing, but would make hard currency scarcer, weaken the ruble and push up inflation.

Although changes to how the Russian government taxes oil companies have stabilized public finances after a record high in spending, the inability to recover profits deprives Russia of hard currency at a time when its exporters are already facing longer waiting times for payments, because many Many local companies have lost access to bank correspondent accounts in the West.

In the months following the invasion, families and businesses moved billions of dollars of money to banks abroad. With some foreign revenue now trapped abroad, the pressure on the ruble could get worse since less earnings from exports will be converted into the Russian currency.

Trade distortion leaves few good options for the Kremlin and underscores how little it has bargaining power in a redrawn global oil market, in which Asian powers India and China have seen access to cheaper Russian oil. It also explains why switching from the currencies of Russia’s adversaries remains so risky.

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