The Government of India (GOI) is considering a new rupee-rouble payment mechanism with sanctions-hit Russia, similar to what it has established with Iran.
"We are trying to give some cushion to exporters in terms of going for a trading in the national currency, similar to what we have been doing with Iran, to avoid any unnecessary panic," a senior commerce department official told Business Standard on condition of anonymity. "The proposal to re-establish an escrow account has been discussed with the finance ministry. Something will be worked out soon."
However, it is at a nascent stage. The finance ministry and the ministry of external affairs have to agree on the details. The planning is to revive the likes of the escrow account GOI once maintained with the erstwhile Soviet Union. It became dysfunctional gradually, after that country's structure fell apart. Exporters have been urging the government to intervene, as the rouble continues to fall in the wake of Western sanctions and plummeting crude oil prices. The Russian currency's value has fallen by 45 per cent against the dollar and euro since January.
With sluggish demand from America, slackening growth in Europe and recession in Japan, exporters in India already faced a tough time. The rouble crisis adds to the heat. The worst hit appear likely to be exporters in engineering, pharmaceutical and agricultural products.
"The crashing of the rouble will have serious implication on exports to Russia. In a few sectors, domestic products will gain competitiveness, with imports becoming costlier by 100 per cent. Since the balance of trade is in favour of Russia, we may discuss the possibility of converting dollars payable on imports into a rupee account managed by a nodal bank in India," said Ajay Sahai, director-general of the Federation of Indian Export Organisations. He said the idea was that Indian exports be invoiced in rupees to insulate these against currency volatility. These could be credited to the account of Indian exporters once the proof of shipment was given.
"Such a system is working fine with Iran (also the target of Western sanctions) and can be replicated with Russia, if it agrees," said Sahai.
The governments of India and Iran have an agreement that India will pay in rupees for its import of crude oil, through UCO Bank. This amount is adjusted for the payments Iran has to make for imports from India.
It's unclear if the proposed rouble-rupee payment mechanism will be similar or India will receive payments in rupees and Russia in roubles for their exports, at a fixed exchange rate.
Invoicing in the rupee is permitted even now but since the rouble is not a freely convertible currency, exporters will not be eligible for usual benefits provided under the Foreign Trade Policy, Sahai added.
According to Anupam Shah, chairman, Engineering Exports Promotion Council, the Russians will be resorting to local sourcing and boost domestic manufacturing, substituting for imported products. Russia will buy only those products from India or other countries that are not produced domestically or are in dire need.
Business Standard, Nayanima Basu | New Delhi
December 24, 2014