With western countries imposing sanctions on Russia, even blocking its financial institutions from a vital, interbank messaging-system called the SWIFT, India and Russia have been working to fast track an alternative trade settlement mechanism.
Without it, Russian importers may not be able to clear up to $500 million in payments to Indian exporters.
The alternative payment mechanism that is being talked about is the rupee-ruble trade arrangement. While the arrangement could help Indian exporters in the near term, it could lead to some pain in the long term.
It could lead to longer receivable cycles for Indian exporters because of a steep crash in the Russian currency, said Dr Ashok Panigrahi, who is the associate professor at NMIMS Shirpur. In fact, there are also chances of Russian exporters defaulting on payments, he added.
Read also: What is happening to the ruble?
What is the rupee-ruble trade?
It is a payment mechanism between India and Russia to settle trade payments in rupees and rubles, instead of dollars and euros. Goods imported to India will be paid for in rupees and goods imported by Russia will be paid for in rubles. This is being done to reduce dependence on the dollar and makes the countries less vulnerable to US sanctions.
What will be its mechanics?
According to Dr Panigrahi, who is the associate professor at NMIMS Shirpur, to operationalise the mechanism, a Russian bank will have to open an account in India and an Indian bank will need to open an account in Russia, to collect and make the payments in the respective countries. For example, an Indian exporter will be paid in rupees from the Russian bank’s account in India.
Read also: Govt to work out alternative trading mechanism with Russia only after situation eases
Why was this set up?
While it is back in the news now, this was an arrangement that was designed decades ago. In fact, it was done in 1953, when the Indo-Soviet Trade Agreement was signed. This didn’t go so well in the long run because Russia didn’t need as many things from India as India did from the other. So Russia ended up with a lot of rupee reserves. Therefore this system slowly withered away by the mid noughties.
Will the dollar be completely done away with then?
To keep the dollar out of the equation, you would need a direct rupee-ruble conversion rate, which is currently not available, said Dr Panigrahi. Global currencies are pegged to the dollar. So to arrive at a conversion rate, you will need to convert rupee to dollar and ruble to dollar, to reach at the rupee-ruble exchange rate. If we are to arrive at a rupee-ruble direct exchange rate, then the governments and the central banks of both countries have to agree on the rates.
In what currency will the invoices be raised, under this mechanism?
If it is implemented, the importers will be billed in the exporting country’s currency.
Are there alternatives to SWIFT?
India, Russia and China have been working on an alternative even before the pandemic. While a collective one is yet to materialise, individual countries have made some progress.
Russia is internally using the (Structured Financial Messaging Solution) SPFS system, developed after the West threatened to cut it off from the SWIFT system in 2015 when it annexed Crimea, said Dr Panigrahi. It was used for the first time in December 2017. In 2015, China also launched an alternative payments system called Cross-Border Interbank Payment System (CIPS). India does not have a domestic financial messaging system, but newspaper reports have said that the country is working on a service that will link its banking to the Central Bank of Russia’s platform.
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