Government to work out alternative trading mechanism with Russia only after situation eases

Representative Image Russian oil processing facility. Courtesy : Reuters

Even though trade with Russia has stagnated in the wake of the Ukraine conflict, the government has decided to hold back on initiating an alternative payment mechanism with Russia until the ongoing crisis eases and the full extent of Western sanctions on Moscow is understood completely.

Apart from geopolitical compulsions, India needs to ensure that revamping trade flows to Russia amid global sanctions doesn’t do more harm than good to the export and banking sectors, multiple senior officials told Moneycontrol.

Twelve days after Russia invaded Ukraine, it continues to be hit with a slew of economic sanctions, trade measures and punitive banking restrictions by the US, European Union and other Western allies such as Japan, Canada, Australia and the UK. Even China has said transactions with multiple Russian banks would be scrutinized.

Crucially, the Society for Worldwide Interbank Financial Telecommunication or SWIFT system has been closed to seven major Russian banks, which means they can’t initiate transactions involving lenders or entities on the list. SWIFT is the world’s leading interbank system facilitating transactions between banks from 200 countries.

Treading cautiously

Export dues worth $500 million are currently stuck with Russian buyers as Russian banks have gone offline from global trade payment systems, according to the Federation of Indian Export Organisations.

“Over the weekend, while the government assured trade stakeholders that all existing transactions would be sorted out, it also stressed that the latest sanctions by the US are more stringent than the ones directed against Iran earlier,” a senior industry representative said.

“Judging by the prevailing global mood against Russia, the government also feels that bypassing the sanctions will definitely irk the Western allies such as the EU, US and UK, who also happen to be major trade partners. India is also currently in the process of negotiating trade pacts with many of these nations. Acting against their interests right now may also have an impact at the negotiation table later on,” a commerce department official warned.

India’s actions on the matter are under close watch by these nations. To this end, it has been decided that the finance ministry and the Prime Minister’s Office will have the final say on the issue. “They are being updated on the trade challenges and are in close communication,” an official said.

Russia is currently only the 25th largest trade partner for Delhi. In the April-December period of the current financial year, bilateral trade with Russia stood at $9.4 billion. Trade had fallen to $8.5 billion in the previous year (2020-21) as a result of the pandemic, down from $10.1 billion in 2019-20. Merchandise trade had hovered around the $10-billion mark for the past five years.

Challenges galore

However, the gamut of trade and business remains relatively large and extremely diverse, with thousands of traded goods. While a number of possible workarounds exist at this point, most of them are expected to run into operational challenges soon, another commerce department official said.

For the moment, two options have been identified as the most feasible in the short term or the next one to two months. “This includes routing transactions through smaller Russian banks which are as yet untouched by sanctions, and a selected barter system whereby both nations agree on a set of commodities to be sold to each other in exchange for the other,” he said.

However, the fluid situation has stopped official discussions with any Russian banks given how both the US and EU have threatened to expand their respective lists of Russian banks under sanctions. Also, most Russian banks with international operations are struggling to stop major fund outflows as wealthy Russians and business entities become desperate to shift their holdings outside the country.

“On the other hand, a barter trade mechanism will leave out the vast majority of products. It usually focuses only on those goods with the largest value of trade such as diamonds from Russia or Indian engineering goods. Or the goods having the most strategic importance such as oil. This situation also opens up the government for intense lobbying by industry, as we have seen earlier,” the official said.

A barter mechanism would also require an agreement on valuation since commodity prices fluctuate frequently and widely and it would need to be decided whether the valuation of select products would happen in Russian roubles or Indian rupees.

However, long-term options such as trading in local currencies (rupee-rouble trade), or a rupee auction by the Russian central bank may be more feasible. But both of these work only partly and lead to much slower trade flows.

India has had a history of trading in local currencies with Russia and Iran earlier. “However, both had to be abandoned as a result of balance of payments issues whereby skewed trade flows inevitably led to one nation ending up with a large reserve of the other’s currency which couldn’t be used to buy anything else,” a senior Delhi-based trade expert said.

He added that the government had sought the views of former commerce department officials and experts on the matter. “This time around, such an arrangement would have to ensure that trade flows stay strong even as Russian trade may become destabilised as a result of increasing isolation,” he stressed.