Ukraine crisis: Payment system for India-Russia trade in offing

India is stepping closer to setting up an alternative payments system to maintain its trade with Russia by identifying a potential bank, as a top panel examining the issue recommended prioritising edible oil and fertiliser imports as well as payments owed to India, an official aware of the development said. The interministerial panel has been tasked with scrutinizing the impact of economic sanctions imposed by the West on Russia on India’s economy. It is led by economic affairs secretary Ajay Seth and includes officials from the ministries of food and consumer affairs, fertilizers, commerce, external affairs and petroleum. The sanctions have already impacted developed and emerging economies alike, devaluing many currencies, including the rupee, firing up crude oil prices, disrupting supply chains and heightening worries of inflation, which erodes households’ incomes. The official declined to name the bank being zeroed in on. The government would be prioritising imports of edible oil and fertiliser, he said, requesting anonymity. Any shortage of these two commodities, of which India is a net importer, can stoke food inflation and disrupt the farm sector ahead of the summer cropping season. Consultations have been held with representatives of the Reserve Bank of India, the country’s central bank, The State Bank of India and UCO Bank, the official said. India may be able to negotiate a better price for its share of Russian oil and gas imports since Russia’s oil market has shrunk, it emerged during the discussions, the official said. The payment mechanism will be similar to the one India had set up to import Iranian oil when the US imposed sanctions against that country. Then, the Kolkata-based UCO bank anchored a so-called “vostro account”. When an Indian bank is finalised, Russia will deposit ruble in it, while India will deposit rupees. A notional exchange rate (that determines how many rubles are equivalent to a rupee) will be arrived at by pegging it to an international currency, “most likely the dollar”, said Biswajit Dhar, a trade economist who teaches in the Jawaharlal Nehru University. So how does this work? After all, the rupee itself doesn’t buy anything outside India without being converted into dollars. Likewise, the ruble has no use in India. What will Russians do with India’s rupees and what will Indian traders do with ruble? The basic mechanism is that the alternative system will purely be a bilateral system. “Russian will use all the rupees it gets from Indian importers to then buy goods from India. Indian exporters will use all the rubles they get from Russia to pay for imports from Russia,” said Dhar. India sources 11-11.5% of total imports of edible oils and a key fertiliser (muriate of potash) from the Russia-Ukraine region, according to official data. India also imports 2.3% of its total crude oil from Russia.