India, Russia suspend trade in rupees, India’s defense import from Russia takes a nosedive

India and Russia have suspended efforts to settle bilateral trade in rupees, after months of negotiations failed to convince Moscow to keep rupees in its coffers, two Indian government officials and a source with direct knowledge of the matter said.

This would be a major setback for Indian importers of cheap oil and coal from Russia who were awaiting a permanent rupee payment mechanism to help lower currency conversion costs.

With a high trade gap in favor of Russia, Moscow believes it will end up with an annual rupee surplus of over $40 billion if such a mechanism is worked out and feels rupee accumulation is ‘not desirable’, an Indian government official, who did not want to be named, told Reuters.

India’s finance ministry, the central Reserve Bank of India and Russian authorities did not immediately respond to requests for comment.

The rupee is not fully convertible. India’s share of global exports of goods also is just about 2% and these factors reduce the necessity for other countries to hold rupees.

India started exploring a rupee settlement mechanism with Russia soon the invasion of Ukraine in February last year, but there has been no reported deal done in rupees. Most trade is in dollars but an increasing amount is being carried out in other currencies like the UAE dirham.

The two sides have spoken about facilitating trade in local currencies but the guidelines were not formalised.

Russia is not comfortable holding rupees and wants to be paid in Chinese yuan or other currencies, a second Indian government official involved in the discussions said.

“We don’t want to push rupee settlement any more, that mechanism is just not working. India has tried everything we could to try and make this work but it hasn’t helped,” a third source who is directly aware of the developments said.

Since Russia’s invasion of Ukraine on Feb. 24 last year, India’s imports from Russia have risen to $51.3 billion until April 5, from $10.6 bln in the same period in the previous year, according to another Indian government official.

Discounted oil has constituted a large part of India’s imports, surging twelve-fold in the period. Exports from India in the same period fell slightly to $3.43 bln from $3.61 bln in the previous year, the official said.

Another official said both countries have started looking for alternatives after the rupee settlement mechanism did not work out but did not give details.

The sources said trade with Russia has been continuing despite sanctions and payment issues.

“Right now we are making some payments in dirham and a few other currencies but the majority is still in dollars. Settlement is happening in different ways, third party countries are also being used,” one of the government officials said.

Indian traders are currently also settling some of the trade payments outside Russia, the officials said.

“Third-parties are being used to settle trade with Russia. There is no ban on transacting with other countries over SWIFT. So payments are being made to a third country which route it or offset it for their trade with Russia,” the other official said.

On whether money was also being routed via China, the official said: “Yes, including China”.

India, Russia defense relationship takes a nosedive

Russia will struggle to solve these problems in the short term and will likely have a severely restricted export capacity for the rest of the decade as its defense industry seeks to adapt to the new circumstances. Some systems may be less affected because they have seen little use in Ukraine, such as air-to-air missiles and naval systems. Nonetheless, Moscow will likely continue to lose ground in export markets as many countries seek to diversify their suppliers or invest in their own production capabilities.

A SIPRI report published this month said Russia remains India’s largest arms supplier, despite a drop in defense imports from 62% to 45% between 2017 and 2022.

This has included delays to the delivery of the five S-400 surface-to-air missile systems India had ordered from Russia for $5.4 billion in 2018, with New Delhi still awaiting delivery of the last two regiments. The delivery of all five regiments—normally comprising up to 16 launchers each—is now expected to be completed by early 2024, one year later than planned. Additionally, the return of one of India’s Kilo-class diesel-electric submarines from refitting in Russia has been delayed.

New Delhi, on its own initiative, has also delayed, suspended, or canceled plans to procure additional equipment from Russia. This includes plans to procure 48 additional Mi-17V-5 medium-lift helicopters, for which India will now focus on its domestic Multi-Role Helicopter program instead. In May 2022, New Delhi indefinitely suspended negotiations with Moscow for the acquisition of 10 Ka-31 early-warning helicopters due to payment issues and concerns over Russia’s ability to deliver. India also canceled the acquisition of 21 MiG-29 and 18 Su-30MKI aircraft from Russia.

India is highly unlikely to reverse plans to increase defense spending on indigenous designs and companies, even though these plans can run counter to urgent operational requirements. Competition to deliver the decreasing range of weapons eligible for import will benefit France, Italy, the U.S., and Israeli companies.

Purchases from Russia will continue where possible, sanctions permit and Russia can deliver at a reduced and sporadic pace that prioritizes support for existing systems. Defense procurement is measured in decades, and India will have to learn to live with disruption to its supplies from Russia into the 2030s.

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