The grammar of commerce in a new age of geopolitics
The use of the Indian rupee for international transactions shifted due to the Ukraine-Russia war and sanctions. Russia and India settled trade payments in rupees amidst concerns over surpluses and currency stability.
- India’s status as a favoured trading partner with substantial market potential has been evident since March 2018.
- A shift in the use of the Indian rupee for international transactions has emerged due to geopolitical events.
Amidst geopolitical changes, India and Russia turned to settling trade payments in Indian rupees, navigating the effects of the Ukraine-Russia war and resulting sanctions. This shift reflects a broader trend of local currency settlements and a potential shift in the global financial architecture.
Utilising Rupee for International Payments
- The Ukraine-Russia war and subsequent sanctions on Russia by the US and EU led to a change in international payment methods.
- India and Russia chose to settle trade payments in Indian rupees to navigate the sanctions.
Payment Modalities
- Payments from India or Russia are directed to Rupee Vostro accounts in Russian banks, managed by authorised Indian banks.
- Indian importers pay rupees to the Vostro account based on invoices from Russian suppliers.
- The arrangement covers items like mineral fuels, crude oil, and defence systems.
Challenges with Surpluses
- Despite the arrangement, Russia maintained a trade surplus with India, causing concerns about the stability of the Indian rupee.
- Russia hesitated to accumulate more rupees due to the currency’s position in the global hierarchy and potential depreciation.
Payment Alternatives
- To address payment difficulties, Indian refiners began settling payments for Russian oil using the Chinese yuan, acceptable to Russia.
- Russia accepts yuan payments due to its oil transactions with China.
Historical Context
- Similar bilateral trade and clearing arrangements were used by India in the 1950s, notably with the former Soviet Union.
- Bilateral trade arrangements used rupees for handling trade and credit-related transactions.
Geopolitical and Geoeconomic Shifts
- Current local currency settlements align with a trend of avoiding reliance on the hegemonic currencies of advanced economies.
- Agreements like the recent rupee-dirham pact between India and the UAE aim to avoid exchange risks and promote efficient transactions.
Prospects of New Financial Architecture
- The use of local currencies among South countries could lead to a new financial architecture.
- Institutions like the IMF, World Bank, and private capital might play a reduced role in these transactions.
Balancing Geoeconomics and Geopolitics
- Potential political and currency-related issues may arise, especially with China’s role.
- However, geoeconomics might outweigh geopolitics in this evolving landscape.
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