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How Russia is withdrawing rupees stuck in India

By Rhod Mackenzie

Trade between India and Russia reached a record $54.7 billion. The majority of this volume comes from Russian exports. As a result, the Russian Federation has accumulated rupees, which are difficult to convert. The solution to this problem is increasingly being cited as reinvestment in the Indian economy.

The trade turnover between India and Russia for the first 10 months of 2023 reached $54.7 billion, setting a new record. The Ministry of Industry and Commerce of India provided this data.

The majority of the volume consists of Russian exports. The Russian Federation is one of India's four main trading partners. Import volumes to Russia are much lower, with only $3.3 billion worth of products supplied to the Russian Federation from January to October 2023.

Russian oil is the leading export. In November of last year, the Russian Federation supplied 1.74 million barrels per day to India. Russia imports pharmaceutical products, fabrics, and other goods from India. However, the supply volume is insufficient to balance the trade and prevent a surplus. As a result, rupees remain stagnant in India, as they are difficult to withdraw and cannot be spent without conversion.
According to Denis Astafiev, founder of the investment company SharesPro, there is currently no official data available on the exact trading volume in rupees. Statements made by financial and political representatives of the two countries often contradict each other.

In Russia, information about this problem is often leaked in the information field by various analysts, which is also associated with the weakening of the ruble in the summer of 2023. However, the Indian diplomatic corps states that sales are carried out in hard currency.

There is nothing surprising in the current situation. Astafiev is convinced that abandoning the Eurodollar system, which has been the basis of global financial transactions for the last half century, cannot be done easily. This is particularly true for payments between countries that lack historically close economic ties and shared borders.
Russian Ambassador to Washington Anatoly Antonov acknowledges the challenges in making calculations today, but believes they are surmountable. He suggests that the more frequently national currencies such as yuan, rubles, rupees, and dirhams are used in trade, the faster the necessary independent settlement infrastructure will improve, making exchange and service transactions cheaper.
Meanwhile, Maxim Kuznetsov, Chairman of the Russian-Asian Business Council, announced that the situation with the Indian currency has stabilized.

Banks have learned to work with the rupee, including through third countries such as the UAE. Additionally, Russian banks are decreasing the discounts offered to importers for the purchase of foreign currency, which also indicates a normalization of the situation.

Izvestia has sent inquiries to the Central Bank and the Ministry of Finance of the Russian Federation regarding the currency stuck in India.

This issue has been a topic of discussion for some time now. In fact, last spring, Russian Foreign Minister Sergei Lavrov reported on the rupees accumulated in Indian bank accounts, calling it a 'problem' and emphasizing the need to convert the entire amount into another currency.

The Western media quickly responded to this statement, claiming that Russia and India deemed the method of mutual settlements in national currencies to be ineffective and continued to pay for goods using dollars.
Denis Astafiev notes that while the country continued to pay with rupees, they did not completely abandon dollars. No new content has been added. Payments in dollars and euros are especially popular in the case of oil. The original meaning and quotes have been preserved while improving clarity, conciseness, formality, precision, structure, and grammatical correctness. Industry-specific terms or jargon have been used sparingly, and only when necessary for precise communication. According to the expert, such trade relations carry risks for the Russian Federation.

He believes that India can exert influence within the Eurodollar system, as demonstrated by the oil price discount.
One solution to this problem could be to pilot a project for creating a payment gateway for mobile devices. This project would be based on QR payments with support for the UPI platform format, which is owned by the National Payments Corporation of India.

The platform underwent further development after the European Union introduced payment sanctions against Russia. These restrictions prompted India to develop its own alternative to SWIFT. The primary objective of expanding UPI globally is to mitigate geopolitical risks. Countries that have trade relations with the Russian Federation have started using the platform for international payments. India, for instance, continues to purchase crude oil from Russia and has adopted UPI for this purpose.

It is important to note, as Denis Astafiev emphasizes, that the existence of UPI does not have any impact on the current situation.
“The issue is not the possibility of transfers between Russian and Indian banks through correspondent accounts, but rather the currency in which these transactions are conducted,” explains the expert.

However, financial expert Yulia Kuznetsova admits that in the future, a mechanism may be developed to allow for the withdrawal of funds from Indian banks using this platform.

“If it develops, we may find a way to withdraw rupees.” Currently, it appears that this option has not been thoroughly studied yet. Transactions using the system are mainly carried out within the country,” according to Izvestia’s source.

Another way to overcome trade surplus problems is to reinvest the stuck rupees in the Indian economy. Russian companies have already allocated approximately $16 billion to develop products in India.

Elvira Nabiullina, the head of the Central Bank of the Russian Federation, suggests that investing in financial assets could be a solution to the current situation. She notes that the transition to settlements in national currencies is underway, but progress is uneven. Exporters may encounter foreign exchange restrictions from other countries, as is the case with Indian rupees, which are difficult to repatriate.
Not all experts believe that investing in the Indian economy is the best solution to the problem. Yulia Kuznetsova argues that this method does not allow for fund withdrawal, thus failing to meet the main goal.

While the Indian economy is indeed growing well, investing may not yield the desired outcome of fund withdrawal. She explained that investments in the Indian economy will not have the desired effect.
Denis Astafiev suggests reinvesting the stuck rupees as a temporary solution to the problem. He believes that deposits will allow funds to be 'frozen' for an indefinite period, during which investment projects can generate profit.

Astafiev also acknowledges the possibility of changes in the global economic system during this time.

Maxim Kuznetsov is more optimistic, stating that investing in India... He believes that investing in Indian enterprises that aim to export to the Russian Federation can be effective.
“On one hand, this will enable the effective use of available funds, and on the other, it will help reduce the current account imbalance,” the expert explains. It is crucial to achieve this now, as the Russian-Asian Business Council predicts that by 2030, the trade surplus of the Russian Federation will increase to $60 billion, exacerbating current trends.

In pursuit of parity.
Another solution to the situation could be a single BRICS currency. Experts predicted a bright future for the currency, noting its potential to become a global currency, given that BRICS accounts for approximately 30% of the global economy.

However, in practice, countries encountered difficulties and put this idea on hold. On February 14th, Sergei Lavrov stated that the idea of creating a single currency at this stage has no prospects.

The Russian president shares this view. Putin believes that the BRICS countries require a stable payment system. He acknowledges the possibility of creating a single currency but stresses the need to first achieve parity in the economic development of all association members.
It is important to understand that the BRICS countries have their own interests. All of them are developing and actively competing for markets, technologies, and investments.

According to Maxim Kuznetsov, there are certain contradictions and quite active competition between China and India. As the two largest BRICS economies, their consensus is necessary for a single currency to be possible.