As the government assesses the rupee-ruble trade to avoid any delays or defaults in the wake of the Ukraine crisis, it plans to peg the payment mechanism to a third international currency to ensure that Indian exporters do not lose out. if the Russian currency fluctuates sharply.

Either the dollar or the euro could be used to determine how many rubles would equal one rupee, depending on their respective value against the third currency, a senior source told FE. “But, given the recent high volatility in the movement of the ruble, it must be a dynamic rate and not a fixed one,” he added. Any such mechanism will allow exporters to obtain payments in their local currency.

However, the government has yet to make a final decision on whether to allow such a payment mechanism in the first place. At the moment, he is monitoring the situation closely, he added.

According to the exporters, to operationalize this mechanism, the government must designate banks that will anchor the payments. For example, Uco Bank facilitated payments to exporters, through the rupee-rial mechanism, for supplies to sanctions-hit Iran.

The ruble has weakened more than 38% against the dollar in 2022. It has lost more than 32% since February 22, when the Russian parliament authorized President Vladimir Putin to use military force in outside the country. Similarly, the rupee has appreciated 26% against the ruble since the start of 2022 and 23% since February 22.

The government is considering the rupee-ruble mechanism following demands from exporters, who fear massive defaults on their supplies to Russia in the wake of Western sanctions against Moscow. The Reserve Bank of India has also reportedly sought advice from SBI and Uco Bank on this matter.

But any such mechanism in the wake of Western sanctions against Moscow has strategic ramifications for New Delhi. Thus, the Ministry of Finance will take into account the contributions of the Ministry of External Affairs, except the Ministry of Commerce and the central bank, before allowing this to happen, sources had previously told FE.

Bankers said the impact could be limited if the sanctions remained limited to just the two Russian banks. But if all Russian banks are cut off from the global SWIFT payment messaging network in the future, it will create problems for Indian merchants. Moreover, there will be very few global banks that would still be willing to maintain ties with these Russian banks after the sanctions.

New Delhi buys far more goods from Moscow than it ships to the latter (its bilateral trade deficit was $4.34 billion in the first three quarters of this fiscal year). Thus, payments should not be a problem, if an appropriate rupee-ruble architecture is worked out, the exporters said.

India mainly buys petroleum products, diamonds and other precious stones and fertilizers from Russia. It also ships capital goods, pharmaceuticals, organic chemicals and agricultural products to Moscow. Capital goods and some consumer products accounted for 25% of India’s exports to Russia in the first three quarters of this fiscal year, while pharmaceutical and organic chemicals accounted for over 22% and agricultural items 18%.