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Context:

• To curb its increasing oil import bill and reduce dependence on the expensive US dollar, India aims to enhance bilateral trade with Moscow to $100 billion by 2030.

Trade statistics

• Bilateral trade during April 2020-March 2021 amounted to USD 8.1 billion only.
• Russia has become India’s top oil supplier since the onset of the Ukraine war in 2022.
• Trade deficits in FY 2014: $57 billion.
• Volume of bilateral trade: $66 billion in FY24.

How has India benefited from increased trade volume with Russia?

• India has managed to save over $10 billion by importing cheaper Russian oil in the last two years and has benefited from exporting petroleum products by processing Urals crude.

What does the low exports mean for India?

• Low exports to Russia mean that India has not been able to grasp the opportunity to cut dependence on the expensive US dollar

Why is the widening trade gap with Russia benefiting the yuan?

• Unlike India, China has seized the export opportunities emerging in Russia amid Western sanctions and a host of Western companies and banks exiting the war economy.
• Chinese exports to Russia have grown faster than imports of Russian oil.
• As per Chinese customs data, shipments to Russia jumped by 47 per cent year-on-year to $111 billion in 2023, while imports grew by 13 per cent to $129 billion.
• The two-way trade crossed a record $240 billion in 2023.
• Due to a balanced trade between them compared to India-Russia trade, the use of domestic currency has increased with 95 percent of trade between China and Russia occurring in domestic currency.
• As a result, the yuan is the most sought-after currency in the Russian stock market, despite the popularity of the US dollar.

Steps Towards settlement of trade in rupee:

Developments in GIFT City

• India's first operational greenfield smart city and international financial services centre allows transactions in international currencies and promotes use of rupee in trade transactions.

Asian Clearing Union (ACU)

• The Asian Clearing Union (ACU) is a payment arrangement for settling trade transactions among member countries.
• Established in 1974 by ten central banks of Bangladesh, Bhutan, Iran, India, Maldives, Nepal, Pakistan, Sri Lanka, and Myanmar, it now has 13 members, including India.
• It is the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

Rupee Trade Settlements

• In March 2023, the Reserve Bank of India (RBI) implemented a system for rupee trade settlements with 18 countries.
• Banks from these nations can open Special Vostro Rupee Accounts (SVRAs) to facilitate payments in Indian Rupees.

International Trade Settlement Guidelines

• In July 2022, the RBI announced guidelines for international trade settlements in Indian Rupees and allowed external commercial borrowings in Rupees, particularly through Masala Bonds.

Criteria for being an international currency?

• The FY23 Economic Survey states that one prerequisite for the emergence of an international currency is that it “needs to be increasingly used for trade invoicing.”
• According to the BIS Triennial Central Bank Survey 2022, the US dollar is the dominant vehicle currency, accounting for 88 percent of global forex turnover, while the rupee accounts for just 1.6 per cent.
• According to the survey if rupee turnover rises to equal the share of non-US, non-Euro currencies in global forex turnover (4 percent), it will be regarded as an international currency.

Why are exports to Russia challenging?

Fear of sanctions:

• Reluctance of private banks to facilitate trade with Russia due to fears of Western sanctions as most private banks have significant business interests in Western countries and multiple branches that could face sanctions imposed by the European Union (EU) and the US.

Lack SOPs in rupee settlement:

• Indian exporters are facing difficulties using the rupee settlement mechanism launched by RBI as they were unable to use it due to the absence of a Standard Operating Procedure (SOP) for banks.

Currency volatility:

• The ruble and rupee, unlike the yuan, have experienced considerable volatility, complicating trade in domestic currency.

Payment Issues:

• Due to sanctions, payment mechanisms was disrupted, complicating transactions and increasing reliance on alternative payment methods.

Rising Chinese influence and Changing stance of India:

• In recent years India is accused of tilting towards west due to recent engagements such as Quadrilateral Security Dialogue, Indo Pacific strategy, etc. Russia-China dynamics also has grown through increased trade volume, increased military drills,etc

How Russia and India planning to boost trade: Takeaways from PM’s recent visit:

EEU-India Trade deal:

• During PM’s visit, both countries decided to eliminate non-tariff and tariff barriers in trade and to initiate negotiations for a trade deal with the Russia-led Eurasian Economic Union (EEU), which could ease the flow of Indian products into the EEU.

The Eurasian Economic Union (EAEU or EEU) ●It is an economic union of five post-Soviet states located in Eurasia. ●The EAEU has an integrated single market. ●It was founded in January 2015, Belarus ●As of 2023, it consists of 183 million people and a gross domestic product of over $2.4 trillion. ●Member states: Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia, representing a $5 trillion economy.

Cooperation in manufacturing sectors:

• India and Russia agreed to cooperate in manufacturing sectors such as transport engineering, metallurgy, and chemicals.

Joint Projects:

• Russia and India have also planned the implementation of joint projects in priority areas and emphasised the importance of expanding reciprocal trade flows of industrial products to increase their share in bilateral trade.

Migration and mobility partnership agreement:

• Discussions on the migration and mobility partnership agreement between the two countries is underway.

Conclusion:

• As both nations navigate their geopolitical landscapes, these collaborative efforts could pave the way for increased trade flows, diversified economic partnerships, and a more resilient bilateral relationship in the years to come.

Important articles for reference:

Importance of Russia for India

India russia trade imbalance

Internationalisation of currency

Sources:

• https://indianexpress.com/article/explained/explained-economics/yuan-challenge-how-india-russia-trade-gap-threatens-rupee-internationalisation-9452308/#:~:text=However%2C%20the%20dynamics%20of%20India,worth%20%2466%20billion%20in%20FY24
• https://www.orfonline.org/expert-speak/the-state-of-india-russia-relations-in-light-of-pm-modi-s-visit-to-moscow

PRACTICE QUESTION Q. Discuss the implications of increasing trade between India and Russia in the context of geopolitical shifts and economic self-sufficiency. How can India leverage this relationship to reduce dependence on the US dollar?(250 words)