Indian exporters can finally expect shipments to Russia to be settled in rupees next week, the first time the new system will be tested since the Reserve Bank of India launched it months ago.
This comes in the backdrop of increased inquiries from sanctions-hit Russia for products such as drugs and automobile parts as the war in Ukraine enters its 10th month.
“Several issues have been sorted out. Exporters and importers have begun approaching banks for the opening of the accounts,”Ajay Sahai, Director General, Federation of Indian Export Organizations (FIEO)
“So, trade settlement with Russia under the new payment system is expected from next week for some shipments. The difference with Iran is that India is not importing oil and fertilizers (from Iran) like we are doing with Russia; so, the Vostro account is dry. Similar kinds of sanctions are on Iran too,” Sahai added.
Amid a widening trade gap between Russia and India, this assumes significance. Whereas Russia in the past few years has swiftly established itself as India’s top oil supplier, Indian exports to the sanctions-hit country are declining as exporters are wary of western sanctions and the lack of a smooth payment mechanism.
“As of now, five to six banks have been allowed to open Vostro accounts to facilitate international trade settlement in rupees. Besides, about 10-11 Vostro accounts have been opened. For instance, there are six Vostro accounts opened in IndusInd Bank which means six different Russian banks have opened accounts in the bank,” a government official said on the condition of anonymity.
Indian exporters are facing an increase in the cost of shipping goods to Russia with state-run Sberbank charging a 4% premium on settling these trades, at a time India’s trade deficit with Russia has ballooned.
When rupees accumulate in a bank, converting it to a desirable foreign exchange and taking it back to the host country—Russia—is their responsibility. Sometimes, this conversion—rupee to dollar or dollar to ruble —might prove to be costly due to currency fluctuation. But as and when the exports grow, they won’t face the conversion risk. At that time, the premium should come down,” the official added.
Highlighting that there have been a lot of inquiries, Sahai of FIEFO says, “Russia requires almost everything under the sun. But these are just inquiries at the stage. How many will translate into order will depend on several factors. Because right now, they are exploring if we can supply the product or not. Other countries are looking into the business. So cost, competitiveness, and several factors will play a role. Indian exporters have a diversified market; so, whenever they take a call, they will factor in all the issues. They have exposure in Europe and the US. Russian importers have only shared the product list and not the quantity,” Sahai added.
“With Russia, our imports are 10 times the exports. But there is a very good chance of increasing our exports to Russia. That’s because when they are holding much of the Indian rupees, either they will want to invest in capital in India or they will increase our exports,” the official cited above said.
India’s exports to Russia stood at $1.29 billion between April and September, compared with $3.25 billion during the last financial year.
Imports from Russia, however, have grown five-fold in the first five months of the fiscal to $17.23 billion. Exporters have also sought the development of an Indian shipping line, as Indian exporters are dependent on foreign shipping lines repatriated over $80 billion as transport services in the calendar year 2021.