India has been working on an alternative rupee-rouble payment arrangement with Russia to continue trade with its strategic partner.

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The mechanism, which is expected to come in this week, will help Indian exporters continue their business with Russia despite the sanctions imposed by the West, restricting international payment mechanisms, CNBC quoted A Sakthivel, president of the Federation of Indian Export Organisations (FIEO), as saying.

According to Sakthivel, the Indian government is likely to allow four to five state-run banks to be engaged in the trade. The finance minister is said to have held consultations with the RBI governor and banks on the matter, the report said.

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Work in progress

Last week, the Reserve Bank of India officials reportedly met officials from three Russian financial institutions -- VTB, Sberbank and Gazprombank -- to discuss possible payment mechanisms, including the rupee-rouble trade, Economic Times reported. The central bank may call for a deeper engagement of Russian banks that already have branches in India to facilitate the trade.

"If such an arrangement is approved, the need for an Indian bank playing a nodal role-as Uco Bank did for Indo-Iran trade (post US sanctions on Iran)-may not be needed. Funds would move between the respective local bank accounts of Indian firms doing trade with Russia and the Russian bank branches in India," a banker told ET.

What is the rupee-rouble trade?

Rupee-rouble trade is a payment mechanism by which Indian exporters will get paid in the local currency for their export to Russia instead of the dollar or euro, which is the standard international currency. For this to work, a Russian bank will need to open an account in an Indian bank and an Indian bank will have to set up an account in Russia.

Also Read: View | Digital Rupee will transform fintech and create opportunities

How will it work?

Both the countries will agree to hold a specified amount in the local currencies in the two accounts. For instance, if the amount agreed is $100 million, the Indian bank’s account in Russia will have rouble worth the amount, while the Russian bank in India will hold rupee worth the amount.

Both the countries will have to agree on the exchange value and also have a notional value of equivalence, most likely in dollar or euro, to which the value of the Indian and Russian currencies will be pegged. Once the mechanism is set up, exporters can engage in trade from both countries.

Which sectors will it apply to?

According to reports by Business Standard, the payment mechanism will initially apply to the agriculture, pharmaceuticals, and energy sectors, which have been hit by the sanctions imposed by the US and its allies. Such a payment mechanism for trade-in defence equipment and dual-use items would require extensive deliberations, the report said.

What about US

India’s engagement with Russia risks angering the US, which has imposed sanctions on Moscow for its invasion of Ukraine. The US is India’s largest export market, with bilateral trade standing at $112.6 billion in the calendar year 2021.

Also Read: Russia, India exploring payments options to continue trade amid sanctions; yuan on the table

(Edited by : Jomy Jos Pullokaran)