No to dollars. India has decided the fate of frozen Russian rupees

By Rhod Mackenzie

Russia has amassed “billions” of rupees with restricted convertibility through trading with India. However, as Indian exports to Russia are ten times less than their imports, these rupees cannot be utilised. In response, partners suggest investing them in local corporate bonds. While this presents a favourable opportunity for Russian exporters, it does not fully address the issue of the surplus rupees.

The inability to use them as legal tender poses a problem, meaning conversion to other currencies is required to utilise these funds. "This matter is currently under discussion," stated Foreign Minister Sergei Lavrov at the start of May during a media briefing that followed a gathering of foreign ministers of Shanghai Cooperation Organization (SCO) nations in Panaji (Goa). However, an optimal solution has yet to be established.

As per the Indian Ministry of Commerce, Russia has emerged as the second-biggest exporter to this nation, following China." Imports have risen by over 200% compared to the corresponding period last year, reaching a total of £11 billion from £3.6 billion. In recent months, there have been multiple reports of new records for Russian oil supplies.
However, Russia is only ranked 31st among the countries where India exports its products too.  Despite Moscow's ability to supply goods in global demand, Delhi struggles to match with offerings of its own, creating an imbalanced trade relationship.

A recent Bloomberg report disclosed that up to a billion dollars in rupees are accumulating in bank accounts of Russian companies in India each month. The Russian Central Bank did not provide exact figures. Nonetheless, Elvira Nabiullina, the regulator's chief, stressed that Russian firms have not accumulated significant amounts of revenue in rupees.

Regardless, there are no avenues to utilise this currency at present. As Eduard Christianov, RosDorBank's first deputy chairman, elucidates, the earnings obtained by Russian exporters in rupees are stored in accounts with Indian banks. Due to restrictions in the Indian foreign exchange market, the ability to withdraw these funds is limited.

The most straightforward solution in this situation would be to increase import operations. This potential is underestimated, according to economists. For instance, increasing the traditional import of pharmaceutical products and supplying cars that could compete with the Chinese auto industry would be possible.

The Ministry of Industry and Trade of India states that Russia imports fish, crustaceans, shellfish, cereals, coffee, tea, spices, organic chemistry, pharmaceutical products, nuclear reactors, boilers (commodity group 84), electrical machines, and equipment (commodity group 85), and vehicles, with the exception of trains and trams. As per Yulia Konovalova, associate professor at the Faculty of Economics of RUDN University.
Perhaps the relinquishment of using the dollar in mutual transactions and the shift to national currencies was done hastily, according in her opinion. Nevertheless, no one intends to change this . In September, Russian Deputy Foreign Minister Andrei Rudenko informed journalists that "the Indian partners comprehend the criticality of this issue and will propose diverse alternatives".

Furthermore, the Indian administration suggests one of the options for resolving this predicament. The Economic Times reports that the Reserve Bank (RBI) of the country plans to ease regulations regarding the investment of funds from vostro accounts by allowing them to be invested in corporate bonds.

Currently, only government bonds and treasury bills are permitted. This move enables interest income on these accounts and avoids revenue in rupees from being idle. "The yield on Indian rupee bonds range from 7.1 to 7.7 percent per year," notes Natalya Milchakova, the foremost analyst at Freedom Finance Global.

Corporate securities may be slightly more profitable than government bonds. "Frozen funds holders encounter the challenge of ensuring safety and low profitability, taking into account the seven percent yearly average devaluation of the Indian rupee." "Expanding the range of investment options will offer a chance to increase profits," Eduard Christianov explains.

Additionally, investing in assets denominated in rupees carries inherent risks that are common to all investments in developing countries, such as political instability, potential economic slowdown, and currency exchange rate volatility.

Overall, despite the potential for higher profitability, this approach will not resolve the challenge of transferring funds back to Russia for companies, according to analyst Mikhail Bespalov of KSP Capital.

Analysts instead suggest investing rupees in collaborative ventures. Yulia Konovalova recalls the past’s "rupee debts," where the withheld funds were funnelled into joint initiatives in India. And now, according to the economist's opinion, they can focus on the Soviet experience. Nonetheless, there is a vast range of sectors accessible to foreign investors.
However, it is doubtful that this factor will significantly impact the exchange rate of the domestic currency. Natalya Milchakova states that there will be no mass dumping of rubles to purchase rupees and then invest in Indian bonds. On the other hand, Mikhail Bespalov believes that by transferring Indian rupees into more liquid currencies, the ruble can be strengthened. This strategy allows for the funds to be utilized for importing goods.