Rupee-Rouble Mechanism- UPSC Current Affairs

Rupee-Rouble Mechanism

Today we will talk about the Rupee-Rouble Mechanism in our daily edition of the Current Affairs Dialog box. Navigate through the blog to enhance your UPSC Exam Preparation and also get an idea of the topic’s relevance to the CSE syllabus. 

Prelims: Current Events of National and International Importance.

Mains: Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.      

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Why in the News?

India is considering reviving the Rupee-Rouble mechanism with Russia to facilitate trade in the wake of ongoing Russia-Ukraine Conflict.

Probable Question

The revival of the Rupee-Rouble mechanism with Russia is fraught with challenges.

Background

  • On March 24, 2022, External Affairs Minister briefed the Parliament that a multi-ministerial group had been convened to look into how to overcome challenges amid west backed sanctions on trade with Russia which include managing payments for exporters and importers.
  • He indicated a possible revival of the ‘Rupee-Rouble trade’ to mitigate the impact of sanctions on Russia.

Key Points

About Rupee-Rouble Mechanism:

  • The idea was first conceived in 1953 under the Indo-Soviet trade agreement.
  • The Rupee-Rouble trade arrangement is an alternate payment mechanism which can allow Indian exporters to be paid in Indian rupees for their exports to Russia instead of standard international currencies such as dollars or euros. 
  • Working
    • Under this arrangement, a Russian bank will need to open an account in an Indian bank while an Indian bank will open its account in Russia.
    • Both sides can then mutually agree to hold currency worth a specified amount in the local currencies in their respective accounts. 
      • For Example, If the specified amount is say, $100 million, then the Russian bank’s account in India will have rupees worth that amount while the Indian bank’s account in Russia will have roubles worth that amount.
  • Once the payment mechanism is in place, the Indian exporter can be paid in rupee from the Russian bank’s account in India and imports from Russia can be paid for with roubles from the Indian bank’s account in Russia.

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How Important is the Rupee-Rouble Mechanism for India?

  • Since the outbreak of conflict between Russia-Ukraine, Russia has been suspended from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
  • An estimated $500 million is pending for goods already shipped by Indian exporters and it is now not possible to get the payment through the regular SWIFT channel. 
  • Since transactions with Russia cannot be carried out in international currencies such as the dollar or the euro, a rupee payment mechanism could play a pivotal role in deciding whether Indian exporters will get their payments and if trading can be continued with Russia.

Challenges Involved

  • Strategic Considerations: If India helps Russia flout economic sanctions through ‘Rupee-Rouble trade’, it may then be accused of siding with Russia and this could hurt New Delhi’s diplomatic relations with the Western powers.
  • Fluctuating Value of Rouble: The fluctuation in the value of the rouble could make it difficult to implement the Rupee-Rouble Payment Mechanism. 
Indo-Soviet Agreement:
Under Article VI of the Indo-Soviet agreement which entails:

All payments between India and the then Soviet Republic USSR may be made in Indian Rupees.
For this purpose, the State Bank of the USSR. will maintain one or more accounts with one or more commercial banks in India authorised to deal in foreign exchange.
In addition, the State Bank of the USSR will, if that Bank considers necessary, maintain another account with the Reserve Bank of India.
All commercial transactions to be financed in Rupees will take place through the commercial bank accounts while the account with the Reserve Bank of India will be used only for replenishing the balances with the commercial banks when necessary.

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