Russia is facing a problem of accumulating billions of rupees in Indian banks that it cannot use due to currency restrictions, said Russian Foreign Minister Sergei Lavrov. The issue is a result of a ballooning trade surplus with India, with imports from Russia rising nearly fivefold to $41.56 billion in the first 11 months of the 2022-23 financial year, while exports to Russia shrank by 11.6% to $2.8 billion, according to data from India’s Ministry of Commerce and Industry.
The surge in imports is due to refiners buying discounted Russian oil that has been shunned by the West in response to President Vladimir Putin’s invasion of Ukraine.
Initially, the Kremlin encouraged India to trade in national currencies but plans for a rupee-ruble mechanism for oil imports were abandoned due to volatility in the ruble soon after the war began. India has resisted pressure from the US to scale back relations with Moscow since the invasion of Ukraine.
The imbalance in trade means that “the volume of ‘frozen funds’ can reach tens of billions of dollars,” said Alexander Knobel, director of the Institute of International Economics and Finance of the Ministry of Economic Development.
Furthermore, India’s historically high aggregate trade deficit reduces the possibility of clearing settlements with third countries. Russia is India’s largest supplier of weapons and military hardware, but defense supplies to the South Asian nation have stalled due to a lack of a payment mechanism that doesn’t violate US sanctions.
Indian payments for weapons amounting to more than $2 billion have been stuck for about a year as New Delhi has been unable to settle the bill in dollars due to concerns about falling foul of secondary sanctions, while Russia is reluctant to accept rupees for purchases.
The oil refiners have been trying to settle payments for discounted crude using United Arab Emirates dirhams, rubles, and rupees. Trades can be exempted from international restrictions if they are priced below the $60-a-barrel price cap set by the Group of Seven nations and their European Union partners.
Lenders have opened special Vostro accounts at Russian banks, including Sberbank PJSC and VTB Bank PJSC, to facilitate overseas trade in rupees and keep crude flowing. However, currency restrictions mean Russian exporters face difficulty in repatriating rupees, according to Bank of Russia Governor Elvira Nabiullina.
