Russia has reportedly offered India a discounted price of $35 per barrel on crude oil imports made from Russia. The offered discount is on the pre-war price of flagship Urals grade oil. This might seem like a mouth-watering offer for India, at a time when its domestic fuel prices – much like in the rest of the world – are soaring high and adding to inflationary troubles in an already struggling economy.
Last week alone, India bought 3 million barrels of Russian crude at a steep discount, underscoring the potential for a currency deal between the two nations. India isn’t alone in buying ‘cheaper’ Russian oil. European Union (EU_ nations are doing it as well. Last month, the EU imported more from Russia than it did in the month before that. Despite this, India’s ability to take ‘independent’ decisions, guided by its foreign policy position of maintaining ‘strategic autonomy’, may need to go beyond what the EU or other nations do vis-à-vis Russia.
The Pact Will Help Russia & India Avoid the Dollar
Russia’s own intention here seems clear.
Its economy has been badly hit by Western sanctions and it sees India as a key strategic and economic ally for establishing alternative trade-financial channels by promoting a local-local currency payment system, ie., in the form of a rupee-for-rouble trade. Under this system, India would pay in rupees for the items it purchases from Russia (from oil to defence equipment hardware etc.), equivalent to the value of the product in roubles.
This will help Russia-India trade avoid dealing in the dollar, which functions as the main reserve currency for trade, and more importantly, short-circuit SWIFT, the messaging system used by banks to move money across borders.
SWIFT has acted as a critical surveillance tool (particularly for Western nations): global banks can be slapped with hefty fines if transaction messages show the involvement of a sanctioned entity (in this case, Russia). “Losing access to SWIFT would itself be a punishment because of the system's ubiquity,” argues Andy Mukherjee.
Experience With the Soviet Union & Iran
The rupee-for-rouble trade shall require a complex channel of coordination between both Russian and Indian banks. Russian banks would need to open accounts in the Indian rupee and Indian banks would need to open accounts in Russian roubles. All transactions for trade and capital mobility shall take place in these currencies.
There is a historical context to this for India. In the past, during the Cold War, India and the Soviet Union did enter into similar local currency pacts for short-term trade arrangements, when Western sanctions impacted the Soviet Union and inhibited its ability to deal in foreign currencies.
India tried a similar local payments system with Iran when Iran was badly hit by US sanctions. India bought oil from Iran under a US sanctions waiver by depositing rupees in Indian banks. Tehran used these funds to buy food and medicine from India. However, once the waiver lapsed, India had to stop importing Iranian oil. The balances in the accounts dwindled, and now, Indian firms won't sell Tehran rice, sugar or tea because they may not get paid.
Bilateral Currency Trade May Not Be Feasible in the Long-Term
And that’s where the real issue with such a payment system lies.
If such bilateral (local) currency trade would be prosperous for both trading parties in the long term, the international financial system wouldn’t have seen the rise of (stronger) reserve currencies like the US dollar (now) or Gold (in the past). Trade requires trust, and trust warrants greater transparency and certainty for mutually beneficial business partnerships to thrive.
Most local currency trading pacts are short-lived. This is also because of exchange rate issues. For example, one unit of the Indian rupee was trading almost around one unit of the Russian rouble before the war. Now, over the past four weeks, the INR-RUB gained 22.68 per cent.
An unstable exchange rate (INR-RUB in this case) will create problems for stable financial transactions between the two nations and for all future trades, too. As of now, Indian products are becoming more expensive for Russians to buy and Russian products are becoming cheaper for Indians. The wider the fluctuation in the exchange rate, the higher the uncertainty in trade.
It May Also Be Detrimental for India's Politics
The other key issue is politics.
How would a rupee-for-rouble currency trading system be interpreted internationally by the US and the rest of the Western world? I have previously argued how India’s stance in the entire Russia-Ukraine conflict has so far been disappointing. It haas broadly aligned to indirectly support Russia in its war, albeit, doing so silently so far (through abstentions in the UN votes and not publicly endorsing the war).
A rupee-for-rouble currency trade pact will give a more direct projection of India’s support to Russia. It shall indicate to Washington and other Russia-sanctioning allies of the US that India is comfortable in abetting Russia’s ‘war’ in Ukraine and doesn’t care much for what the West thinks. Somewhere, this also hurts India’s democratic credentials, where it would be seen working hard to support an authoritarian dictator like Putin.
Personal Optics
Personal optics matter as well. Recently, when Wang Yi, China's Foreign Minister, came to India to invite Modi for the BRICS summit, Modi didn't meet him. Britain's Liz Truss came to India after that, asking India to join hands with the West against Russia. Modi didn't meet her either. But, last week, when Russia’s Foreign Minister, Sergey Lavrov, made a visit, Modi met him to have a dialogue. And so, it would be interesting to see how India’s moves (viz-a-viz Russia) shape or affect its long-term interests and relationship with the US, and whether it faces any repercussions.
As a wise man once said: “Nazdiki Fayde Mein Door Ka Nuksan Dekhna Zaroori Hai” (For short-term gains, one should be able to foresee the possibility of incurring long-term losses). India’s ability to manage its domestic fuel needs and defence equipment supplies from Russia – for short-term gains – may lead to longer-term diplomatic costs, isolating it from the West, or worse, adversely shaping its international relations with the US and other Western allies, whose support it needs (in South Asia and the Indo-Pacific) for its long-term seesaw fight against China.
(The author is Associate Professor of Economics, OP Jindal Global University. He is currently Visiting Professor, Department of Economics, Carleton University. He tweets @Deepanshu_1810. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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