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As Heraclitus said, “Change is the only constant”. This quote perfectly encapsulates the workings of the contemporary world. Ever since the COVID-19 pandemic hit the world with a storm, it has been changing faster than ever and has witnessed some major geopolitical and economic advancements. Such changes have sent shockwaves throughout the entire world. The ongoing Russia-Ukraine war is one such event in the post-pandemic world. While India has stayed neutral, a greater part of the world has taken sides. The ongoing war has led to a rise in geopolitical tensions. The Russian economy has been sanctioned, and countries that support Western thought have reduced their oil imports from Russia, aiming to eventually replace them with those from other countries to choke its economy. Moreover, on 3rd December 2022, G7 members formally set the highly anticipated price cap on Russian oil at 60 USD per barrel. All this has resulted in a supply crunch of oil in the world economy. This has, in turn, led to a steep rise in oil prices, leading to severe repercussions such as a widening fiscal deficit, increasing inflation, a severe depreciation of the Indian rupee, a fall in foreign exchange reserves, etc. Amidst all these uncertainties, it became imperative that India find a way out.

The Reserve Bank of India unveiled a rupee settlement system for international trade on 11th July 2022. This has ever since led to a renewed push in the country’s effort to use the rupee to carry out international trade while eliminating the need for US dollars so as to reduce the depreciation of the rupee and save up on crucial foreign exchange reserves. The rupee-rouble arrangement has been the highlight of this project.

India has been at the forefront of maintaining neutrality amid the ongoing Russia-Ukraine war. With trade being one of the primary concerns, India has been working to strengthen its interests without the need to join either of the two sides. Russia is offering goods to India at a discounted price, including oil, gas, and coking coal. Considering the currently volatile market, it appears to be a great offer. However, the question remains: how do these purchases take place? Most Russian banks have been sanctioned, implying that they cannot use the SWIFT payment system. The same goes with the foreign reserves; half of Russia’s forex has been frozen, which is approximately 300 billion US dollars, and a large majority of international trade has been routed through the dollar for decades. But now that Russia’s foreign exchange reserves are frozen and it cannot pay in dollars anymore, one primary option that has emerged is to trade in local currencies. As for the trade between India and Russia, it is called the rupee-rouble system. In such a system, Russia pays in rupees and India pays in roubles, removing the US dollar from the equation.

The Underlying Mechanism

Firstly, there is a need to coordinate between banks. Russian banks will have to open accounts in Indian banks, and vice versa. This ensures that the platform is set. The next step is to hold reserves in the local currency. Russian banks must hold the equivalent of a certain amount of USD in rupees. Once the platform has been established (Vostro accounts) and the means have been arranged (domestic currencies of trading countries), the trade can take place conveniently. Russia’s VTB bank has taken part in this rupee-rouble trade settlement process and has launched a mechanism to collect payment in rupees without the need to use US dollars or Euros. VTB Bank is the second-largest bank in Russia, in which the Russian government has a major stake.

The introduction of the new arrangement can prove to be a commendable move as it will help accelerate bilateral trade between India and Russia. The trade figures between the two countries clocked in at 27 billion dollars within the first nine months of the financial year. The numbers have surged because Indian imports of products like coal, oil, and fertilisers have risen dramatically. As a result, India has a trade deficit with Russia since 90% of the bilateral trade is dominated by Russian exports to India. India is working to strengthen its exports to reduce this trade deficit. The rupee-rouble trade can go a long way towards increasing India’s prospects of raising the volume of exports to Russia.

As of December 2022, nine Indian banks had received approval to open 17 special Vostro Rupee accounts for trade settlement with Russia. The Indian banks involved in the process are UCO Bank, Indian Bank, HDFC Bank, YES Bank, SBI, IndusInd Bank, IDBI Bank, Canara Bank, and Union Bank of India. Some challenges, such as fluctuating exchange rates between the two countries, apprehension of specific sanctions by western nations, etc., have slowed down the process, but solutions are being worked out. It is only a matter of time before the entire process kicks off and both nations begin to reap the benefits.

Apart from Russia, Vostro accounts with respect to other countries, such as Sri Lanka and Mauritius, have also been opened. Moreover, India is already in talks with at least 35 countries for bilateral trade in local currencies, including key trading partners like the UAE and Saudi Arabia.

If bilateral payment settlements in local currencies gain more strength, it will result in a big boost to the prospects of the creation of a BRICS currency too. As per World Bank data (2019), this group contributes to 24% of the world’s GDP and has a 16% share in world trade. This shows that it holds considerable strength on the global stage. Further, with increasing trade ties between India and China, Russia and China, and Saudi Arabia keen to join the group, the de-dollarisation of this group will set a precedent for other groups and countries.


There have been previous attempts to implement similar systems. Two high-profile examples include India and the Soviet Union in 1953 during the Cold War, which had the same intentions of bypassing US sanctions, and a more recent one with Iran, which featured a rupee-rial system in 2012 to bypass sanctions and buy Iranian oil in local currency. The rupee-rial trade had worked very well until former President Donald Trump imposed specific sanctions on Iranian oil, after which the trade lost momentum. Both these examples show us that even though the idea had spirit and substance, it lacked execution.

What has changed?

Many experts reckon that this new bilateral rupee-rouble trade mechanism will be highly beneficial. These benefits accrue not just because of the simplicity of payment settlement and realisation, but also because it eliminates the core problem of setting the exchange rate between the two currencies that has halted bilateral currency swap agreements before.

In the previous Indo-Soviet era version of the rupee-rouble trade, the exchange rate was based on the number of gold reserves. In 1971, global gold reserves became insufficient to support the system of fixed exchange rates, eventually leading to the end of the gold standard. A series of events led to the devaluation of the rupee. India and the USSR could not agree on an exchange rate even 10 years after the devaluation. Finally, they agreed on a rate in 1978—one rupee at ten rupees. The Rouble rate continued to be administered even after India shifted to a flexible exchange rate mechanism.

However, the contemporary world is very different now. The value of the rupee and the rouble are both market-determined now, which is why it will be easier than in the Cold War era to set agreements for the bilateral rupee-rouble trade.

Opportunities and Threats

According to data provided by the Petroleum Planning and Analysis Cell (PPAC), India’s oil import dependence based on consumption was 85.6% in 2021–22. This shows India’s clearly unhealthy dependence on other countries for its oil needs. With energy being the backbone of a country’s economic development, India needs to continue working to cultivate working relationships with countries that will source for it the much-needed oil to keep the economy afloat. Hence, the rupee-rouble trade mechanism will be helpful to India and serve its interests.

Yet, the pace of the agreements has been very gradual. A large number of concerns have been raised, despite how lucrative the deal is for both sides. On top of the list is the severe uncertainty that has emerged because of the ongoing Russia-Ukraine conflict, which can lead to further weakening of the rupee. The rouble’s free fall during the onset of the war also sets a bad precedent with regard to its volatility. Further, another major reason is politics. The rupee-ruble system is not just a financial commitment; it is a political statement. It is a subtle declaration that India plans to buy more Russian goods. This might further create complications for India in handling its relations with the West, which are equally important to India’s neutral style of diplomacy.

The Numbers behind the Story India-Russia trade has been making rapid strides. Russia has become India’s fourth-largest trading partner, with a fivefold increase in imports to 32.9 billion dollars during the period from April to December. The jump to the fourth position in January 2023 from the 25th position at the end of the previous financial year is a very significant one and perfectly explains the changing world order. Apart from improving bilateral relations, it has also provided an impetus for rupee-rouble trade.

Bilateral trade in local currencies is something that both countries mutually aspire for, owing to the win-win situation provided by this arrangement. Even prior to the war, serious efforts had been made to boost such trade. Before 2019, more than 50% of India-Russia trade was settled in dollars. However, in 2021, 53.4% of Indian payments in Russia were made in the rouble, while the USD’s share came down to 38.3%. Russia had even agreed to receive the payment of 5.43 billion dollars in rupees for the delivery of the S-400 air defence missile system.

According to the Directorate General of Commercial Intelligence and Statistics, Ministry of Commerce and Industry, India spent nearly $20 billion on Russian oil in just seven months from April to October. This figure is more than what India paid to Russia in the last ten years combined.

The Big Picture

All these actions suggest a bigger change that is unraveling. The steps taken by India and Russia to deal with domestic currencies and remove the dollar from the equation can end up being a lesson to other countries, which might follow suit. Such an occurrence could lead to a major shift—the loss of dominance of the US dollar in the foreign exchange market and, possibly, the end of its hegemony. This might eventually lead to the creation of a multi-polar world wherein there is no supreme superpower but rather a large number of powerful countries keeping a check on each other’s influence, marking the beginning of a new world order featuring bilateral cooperation among various countries with no individual country being able to display pure dominance.

One of the main reasons for this shift is the increasing instability of the dollar, which has been affected by factors such as the ongoing trade tensions between the US and China, the Federal Reserve’s monetary policy, and the US government’s rising debt. By using their own currencies in international trade, countries hope to insulate themselves from these fluctuations and maintain a stable trading environment.

India has done a commendable job of furthering its interests and leading the way towards de-dollarisation. However, the opportunities that are being presented to India need to be capitalised on by Indian businesses by developing quality products at competitive prices to make India a leader in exports and to bolster its standing as one of the world’s largest economies. Failure to do so would lead to the depletion of India’s rupee reserves to accommodate foreign imports. The move will ultimately be merely another historical failure, like the 1953 Indo-Soviet trade deal and the 2012 Rupee-Rial arrangement, unless Indian exports dominate international markets like Chinese products. To successfully execute this de-dollarisation plan, Indian manufacturing and services will have to rise to the occasion. The export sector needs to be given the right attention so that India can maintain a healthy balance of foreign reserves while continuously increasing the importance of the Indian rupee as a currency for bilateral trade. The rupee-ruble trade is an excellent start, but a lot more needs to be done to make the most of this opportunity. By Ayushmaan Bhatra


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