India pegs trade with Russia and Sri Lanka at $9 billion

Just about a month back, the RBI had issued detailed instruction wherein Indian traders could pay for their exports and imports in Indian rupees. The view is that once the Rupee trade is introduced, then India does not need to denominate its trade with Russia either in US dollars or in Chinese Yuan. Russia is barred from making and receiving payments in dollars while India would not be too keen to have Indo-Russia trade denominated in Yuan, although there was a recent coal import by Ultratech from Russia and paid in Yuan.

With the rupee trade system likely to be fully in place shortly, India expects that the bilateral trade between India on the one side with Russia and Sri Lanka could touch a new peak of $9 billion. By allowing international trade in Indian rupees, it will smoothen the trade process flow for India with Russia and also with Sri Lanka. Once the Rupee trade is in place, then India can ensure that trade with both the countries can be boosted through the rupee route itself. This would also save precious foreign exchange for the Indian economy.

In the aftermath of the Russia-Ukraine war and the sanctions imposed on Russia, most Western nations boycotted oil and gas imports from Russia. That meant, Russia had a lot of surplus oil and gas, which it was willing to sell to countries like India and China at a deeply discounted price. Not surprisingly, crude oil imports from Russia jumped nearly five-fold to over $15 billion between February 2022 and July 2022.

However, due to the payment restrictions, India’s exports to Russia fell from $1.34 billion to $852 million.
Sri Lanka has been an important trading partner for India but in the last few months the island nation has been caught in a maze of defaults and liquidity pressures. The economic woes have had their share of political implications but the opportunity is still there. Since Sri Lanka has been on the verge of bankruptcy, most global banks are not too keen to provide dollar funding , so the best option is to create a long term trade relationship and boost the mutual trade using the rupee international payments route. 

India has played its diplomatic cards on Russia quite deftly. It refrained from condemning Russia; both at the UNSC and the UNGA. While calling for an end to the war, India has also justified its purchases on the grounds that a sudden halt would jack up world prices and hurt its consumers. India’s trade deficit for July is already being pegged at above $31 billion, so they could surely do without too much of commodity inflation. India is looking to prop up its exports to $500 billion in FY23 and Russia and Sri Lanka could play a key role in this shift.