India and Russia have sealed a rupee-rouble payment mechanism to get around western sanctions because of the war in Ukraine, say industry sources.
The news comes as Russian Foreign Minister Sergei Lavrov flew into New Delhi late on Thursday for a two-day visit to ensure bilateral trade can continue despite efforts by the US and European Union to shut down dealings with Moscow.
The new arrangement – expected to be announced during Lavrov’s trip – will allow payments in local currency to each country’s exporters and importers via India’s central bank, the Reserve Bank of India (RBI), and large Russian banks with operations in India.
“What we’ve been given to understand is that the new system will involve the central bank, the RBI, paying Indian traders in rupees through a rupee loan account, while payments to their Russian counterparts will be settled through a similar account in that nation,” said Ajai Sahai, Director General and CEO of the Federation of Indian Export Organisations (FIEO).
India is eager to maintain bilateral commerce due to its reliance on Russian weapons and the chance of purchasing cheaper oil as global prices rise, but the country is also under pressure from Western nations, which see the rupee-rouble agreement as an effort to circumvent sanctions imposed by the US and many of its allies.
However, Prime Minister Narendra Modi has contested those claims by saying the country needs Russian armaments to challenge China, particularly following border clashes in mid-2020. He says alternative sources of arms are too costly.
India is the world’s largest buyer of Russian weapons, and the world’s third largest importer of crude oil after the United States and China.
A rupee-rouble mechanism does not violate western sanctions, according to Sahai, because the two countries will trade products that are not on sanction lists, such as energy (oil and gas), medicines, agricultural products and fertiliser.
Moscow also believes that sanctions should have “no bearing on account opening, account administration, or serving clients from Indian credit institutions,” India’s Economic Times said.
India’s strategic alliance with Russia dates back to the Cold War and remains strong.
This is not the first time such a payment system has been discussed. India and the Soviet Union had a rupee-rouble exchange arrangement during the Cold War, to avoid having to use the US dollar.
India also employed a similar system with Iran, given Western sanctions for its nuclear weapons programme.
“All we want is that the trade between the two countries should not suffer due to the sanctions and we believe that India and Russia have finalised a mechanism already,” said an official from India’s Ministry of Commerce and Industry, who requested anonymity because he is not authorised to speak to the media.
Some Allies Peeved
But as Lavrov flies in, some ministers in the US and Australia chastised India for considering a bilateral trade arrangement that would weaken sanctions imposed by the West, revealing the gap with security partners in the Quad on how to respond to Russia’s invasion in Ukraine.
Refineries in India, the world’s third largest oil importer, have been buying up Russian oil through spot tenders since the war started, taking advantage of significant discounts as other customers walk away.
India has reportedly purchased at least 13 million barrels of Russian oil since February 24, when the Ukraine war began, which is not far off the 16 million barrels it bought in the whole of 2021.
The Business Standard quoted US Commerce Secretary Gina Raimondo as saying the India-Russia payment arrangement was “deeply disappointing”.
Raimondo told reporters in Washington on Wednesday: “Now is the time to stand on the right side of history, and to stand with the United States and dozens of other countries – and not funding, and fuelling, and aiding President Putin’s war.”
Australia’s Trade Minister, Dan Tehan, also emphasised the importance of democracies cooperating “to retain the rules-based approach that we’ve had since World War Two.”
Despite these sentiments, India and Russia are ready to confirm a dedicated payment mechanism to facilitate energy purchases by India from Russia.
• Indrajit Basu
Note: This report was updated on March 31 to correct two aspects in the original text.