India And Russia Choose To Route Their Cargo Operations Through The UAE As The Acceptance Of The Rupee In Trade Is Picking Up.

According to sources familiar with the situation, India and Russia are increasingly choosing to route goods operations through third countries. This is none other than the United Arab Emirates (UAE), allowing for transactions in currencies other than rupees, roubles, and dollars. This is because the provision of rupee-settled trades gains acceptance.

Although a few vostro accounts have been created, the rupee trade has recently gained traction. One claimed that participants increasingly use foreign nations to channel payments not made in INR, roubles, or dollars. The transactions, of which a big portion is for oil deals, are being routed through friendly countries.

According to one of the people, interest in rupee transactions is now low. Even if interest is steadily increasing, complicated invoicing arrangements must be made because the US dollar and euro still have significant sway in the current financial systems. The attempt to route it through third countries is the result of this.

Further mechanisms for rupee trade invoicing, payment, and settlement were made public by the RBI on July 11, 2022. The general framework stipulates that all exports and imports covered by the agreement must be priced in Indian rupees. According to the central bank, transactions will also be settled in rupees. The efforts taken by RBI were intended to foster the growing interest in rupee transactions among the international trade community.

Vostro Accounts.

According to notifications from the RBI, domestic importers who use the rupee settlement mechanism for their imports are required to make payments in Indian rupees that will be credited to special vostro accounts with correspondent banks in alliance countries in exchange for the supply of goods and services from foreign suppliers.

A bank maintains a vostro account on behalf of another lender, usually abroad. Russia has replaced Iraq as the country’s single-largest crude supplier because India chose to buy oil at a reduced price from Moscow.

The St. Petersburg International Economic Forum‘s (SPIEF) director, Alexei Valkov, said earlier in April that trade between India and Russia reached a record $39.8 billion in FY23. In comparison to the calendar year 2021, it is predicted that trade between India and Russia tripled in 2022.

According to Valkov, India progressively supplies Russia with goods, including medications, car components, textiles, and food items. At the RBI’s monetary policy review last week, deputy governor T. Rabi Sankar spoke to the media. He noted that while more people are interested in trading in rupees, some teething problems still prevent volumes from expanding.

Shaktikanta Das, governor of the RBI, commented on the situation and said that the stakeholders on both sides are adjusting to it. It represents a fundamentally new paradigm for all parties involved—banks on both sides, importers and exporters from both sides. India and whichever country is on the other side are referred to as both sides. They are adjusting to it. They anticipate that it will become better progressively.

A government official said in March that up to 30 special vostro accounts had been established by several banks, including HDFC Bank and UCO Bank, to promote rupee trade abroad. The director general of foreign trade, Mr Santosh Kumar Sarangi, claims that banks in 18 countries have created special vostro accounts. 

The countries having Vostro accounts with India are the following.

1. Botswana. 
2. Fiji.
3. Germany. 
4. Guyana. 
5. Israel.
6. Kenya.
7. Malaysia.
8. Mauritius. 
9. Myanmar.
10. New Zealand.
11. Oman.
12. Russia. 
13. Seychelles. 
14. Singapore. 
15. Sri Lanka. 
16. Tanzania. 
17. Uganda.
18. The UK.

According to sources in the banking sector, the UCO Bank in Kolkata, which has an account with the Russian company Gazprom, has engaged in transactions totalling 14–15 crore rupees. The sources said that the trades mostly included approved items like engineering supplies not subject to sanctions lists.

Conclusion.

The action was taken when the local currency was under intense pressure due to Russia’s invasion of Ukraine starting in February 2022. In addition, several countries took measures to break away from the dollar’s hegemony in international commerce due to US sanctions against Russia, which hampered trade. Also, the UAE’s currency, the dirham, is tied to the dollar and enjoys widespread stability, the primary driver behind the attempt to facilitate trade via the country.