- Iqbal Ahmed
- BBC reporter
image source, EPA
Russia invaded Ukraine in February 2022. Western countries, including the United States, imposed various sanctions on Russia. To deal with it, Russia offered to sell crude oil to many countries of the world, including India, at a lower price than the international market.
India accepted Russia’s request. This decision, taken in the national interest, earned the displeasure of India, the US and other Western countries.
But India’s decision may now become a matter of concern.
Bloomberg news agency said in a report that India’s trade deficit is widening due to large purchases of crude oil. One consequence of this is that the Modi government’s plan to denominate foreign trade has made no significant progress.
Professor Amitabh Singh of the Center for Russian and Central Asian Studies at Jawaharlal Nehru University in Delhi elaborates on this.
To understand the current situation, he says, there is a need to understand how trade was done in India and Russia in the past.
India is heavily dependent on Russia for its defense equipment. But the modus operandi of this business is that India will export its goods to Russia for the same amount of money it uses to buy its arms. So no actual exchange of money takes place.
However, the situation has changed since February 2022 when crude oil purchases from Russia began.
Oil imports from Russia
image source, Getty Images
“Hitherto India used to import only one percent of crude oil from Russia. Now crude oil imports have increased to over 20 percent,” pointed out Professor Amitabh Singh.
India buys about 12 lakh barrels of crude oil daily from Russia. Apart from crude oil, India also imports cooking oil and fertilizers from Russia.
But the second concern is that while India’s imports are increasing, India’s exports are decreasing. One statistic suggests that imports have increased by about 400 percent and exports by about 14 percent.
India and Russia had decided to trade in local currencies (Rupees and Rubles).
Reserve Bank of India announced this in July 2022. Also allowed Russian banks to open Vostro accounts in India.
Indian rupees accumulating in Russian banks
Countries trading with India get the facility of paying in rupees instead of dollars for imports or exports through Vostro accounts. Vostro Accounts Launched in India But so far there has not been much exchange in rupees with Russia. Because Indian rupee is accumulating more in Russia due to India’s high imports.
Banks in Russia do not want to have too much rupee.
India has so far bought about $30 billion worth of crude oil, and that money is sitting in Russian banks, says Professor Amitabh Singh.
“Because of the embargo, Russia cannot use that Indian money for international trade. Therefore, the value of the rupee deposited in Russia is depreciating. The value of the Russian currency ‘Ruble’, which is equivalent to the dollar, is also depreciating,” he added.
Veteran journalist Vinay Shukla, who has lived in Russia for decades, says Russian banks fear a second phase of sanctions.
Citing another reason, Vinay Shukla says that people’s preferences in Russia are changing and Indian industrialists are not able to manufacture and export products that Russian people like.
“Russia is now importing a lot of goods from China that used to come or could come from India. This is one of the reasons why India’s exports are declining,” Vinay Shukla noted.
image source, Getty Images
Why the silence?
India buys cheap crude oil from Russia, refines it in India and sells it to Western countries.
Professor Amitabh Singh says that no one in India is worried about this as India is currently earning dollars from it. But this won’t last long, he says.
Earlier, Indian banks used to withdraw money from their foreign accounts and give it to Russia. Indian banks had accounts in Singapore. But the US imposed an embargo on it saying it could not do business with Russia. Currently payment method is working through Hong Kong bank. Professor Amitabh Singh said it will not last long.
“In the long run it will be worrying for India. It will also harm the economy,” he added.
Indian and Russian officials held a meeting last month in this regard. But no significant result came out.
Payment in Dirhams
Professor Amitabh Singh said that both the countries have not been able to find any solution for this at present.
Reliance has been importing large quantities of crude oil from Russia and paying Russia in dirhams, the currency of the United Arab Emirates (UAE). But this too will not last long, noted Professor Amitabh Singh.
“If dirhams continue to be deposited in Russian banks as rupees are deposited, what will Russian banks do with them,” he questioned.
What is the solution?
A New Development Bank was formed among BRICS (Brazil, Russia, India, China and South Africa) countries. Professor Amitabh Singh pointed out that BRICS countries can do business in local currency.
But China enforces stricter rules on its banks. Also China’s economy is huge and it cannot succeed without its help.
image source, Getty Images
Trade balance was maintained between India and Russia. But that is not possible as of today as India has not been able to increase its exports. Imports also cannot be reduced.
“Russia’s Central Bank announced on Wednesday that it has created a new department for international trade in the local currency. With this decision there is hope that things will improve,” noted journalist Vinay Shukla.
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