Top bankers have told the RBI that despite sanctions on eight large Russian banks, Indian trade with Russia can be conducted through banks outside the sanctions. After a meeting convened at the behest of the RBI, which required them to assess how to proceed with trade with Russia and discuss policy options, the Indian Banks Association (IBA) is believed to have communicated to the central bank that while trade can be conducted through non-sanctioned banks, India still has to firm up a payment mechanism that would factor in a new rupee-rouble arrangement, and whether a third country currency (such as yuan) can be used as a benchmark for conversion for the trade settlement.

There are also aspects that need a decision on whether fixed currency exchange be introduced between rupee and rouble or the ongoing system of market forces based free float be continued. 

“The ball is now in the RBI’s court and reactivating rupee-rouble arrangement is a possibility. What we have conveyed to RBI is that there are several non sanctioned banking entities in Russia and options are available to continue doing trade with Russia through these non sanctioned entities despite sanctions, which has affected eight big lenders of Russia,” a banker told BusinessLine while explaining that it was the RBI that had wanted them to deliberate and assess the trade situation in the wake of the ongoing conflict.

Even today, trade settlements are happening through non sanctioned entities without any hindrance, they added. “Problem is with the sanctioned entities and the RBI is looking at how it can be enabled. Some of the Indian banks may have correspondent bank arrangements with them and that has to be looked into now in the wake of sanctions”, sources in banking industry said.

Once India decides on a Russian bank with which it could transact, it could put in place a rupee-rouble payment mechanism, on the lines of the one it had with Iran, to carry out its trade. However, fixing the exchange value between the rupee and rouble will need to be worked out. “Using the market-determined rate of the rouble vis-a-vis the dollar or the euro is unlikely to be acceptable to Russia as the present market valuation of rouble is very low and falling further. “While the value of exchange between the rupee and rouble can be mutually fixed between the two countries, a third currency (like the yuan or dirham) has to be used as a reference currency so that movement in value of the rupee and rouble can be tracked and adjusted,” a source told BusinessLine. The Chinese yuan has the added advantage of being one of the five international currencies in the IMF basket of freely usable currencies.

“The SBI, together with the Finance Ministry and the Ministry of External Affairs, has to work out what an ideal exchange rate would be. The periodicity of fixing the exchange rate also has to be agreed upon as rouble is steadily depreciating,” the source said.

Once the banks from India and Russia have been identified and an exchange rate determined, the Rupee-Rouble mechanism can be put in place. The Russian bank will need to open an account in the Indian bank while the Indian bank will open its account in Russia. Both sides can mutually agree to hold currency worth equal value in the local currencies in their respective accounts. Indian exporters can then be paid in Rupee from the Russian bank’s account in India. For importers., Rouble can be paid out of the Indian bank’s account in Russian.