How will India and Russia keep the money flowing?
How is the Ukraine-Russia War affecting payment mechanisms in India, and how will things between Russia and India look like when it comes to money transfers, at a time when Russia is excluded from the global payment systems and when India is in a favourable position to receive goods cheaply?
A BIT OF BACKGROUND
The Ukraine-Russia War has, overnight, caused global finances to change in unexpected ways. Russia's act of invading Ukraine was reciprocated by Western countries like the UK, US, and the EU, who imposed financial sanctions on Russia. These sanctions included freezing bank accounts, seizing assets of Russian oligarchs present in their countries, and also isolating Russia from the global payment system SWIFT.
Russia, now being isolated in terms of financial trade and exchange, has been forced to look at other payment options to continue trading with neutral countries like India. Though India, having been a historical friend of Russia, has condemned Russia's invasion of Ukraine, it has maintained a neutral stance to continue with trade.
SO, WHAT WAS THE PAYMENT SYSTEM LIKE BEFORE THE WAR?
Countries have globally used a payment system called SWIFT to conduct international bank transfers.
SWIFT is a global payment system which is used by more than 11,000 financial institutions across the globe where each institution has a SWIFT Code (like a unique phone number or unique email address). To put this in perspective, it is like Gmail or Yahoo mail for banks or equivalent to sending SMSes but only for money transfers.
So, say, an ICICI Bank customer wants to send money to their friend in Germany, who has an account with Bank of Germany. The ICICI customer can log in to net banking, enter the bank details of their German friend (like the account number, branch name and the SWIFT code).
Once this transaction is initiated, ICICI will send a SWIFT message to Bank of Germany, which will then be verified and cleared by Bank of Germany and the recipient will get the credit in their German account.
As most of the world uses SWIFT, banning Russia from the payment system has excluded it from accepting funds and making payments outside of Russia. This affects money transfers for imports and exports, thus forcing Russia to look for alternative means to transfer money.
ARE THERE NO EXISTING ALTERNATIVES TO THIS PAYMENT SYSTEM?
In 2014, Russia developed its own alternative to SWIFT. It is called the System for Transfer of Financial Messages, or SPFS. But this system is not well-established for international transactions like SWIFT.
HOW DOES THIS AFFECT RUSSIA?
Without SWIFT, Russian banks will find it harder to communicate with international peers and this will slow down trade and make transactions costlier. Plus, Russia will have to use a phone or fax machine to communicate and payments and receipts will be tougher.
SO, WHY DOES THIS WORK FOR INDIA?
India depends on Russia for weapons and has been pushing the pressure from Western countries by arguing that there is a need to buy weapons to protect itself from China's military tactics. India has also been offered a choice of buying oil at a 25% cheaper price by Russian companies, thanks to the reduced demand for Russian oil from Western countries.
Thus, India can receive goods at a lower rate, specially when global prices are shooting through the roof. And this puts India in a favourable position to create new payment alternatives and continue trading with Russia.
WHAT WILL INDIA AND RUSSIA DO?
As per an Economic Times report, Russia's state-owned development bank VEB and the Reserve Bank of India (RBI) have likely finalised an alternative transaction platform to facilitate bilateral trade. India plans to go through with rupee-ruble-denominated payments using Russia’s messaging system SPFS, which will be installed at both banks.
This will help both countries in seamless transfer of import and export documents for rupee-ruble trade that will be settled by a rupee debt account.
So, basically, RBI will have to open a new rupee-rouble debt account which will be held by VEB, the Russian bank.
HOW WILL THIS WORK?
Say an Indian exporter Ram has received an assignment of exporting tea leaves from India worth, say, Rs 50,000, to a Russian lady named Putina.
Putina will first have to submit an equivalent amount of rubles or dollars to VEB, the Russian Bank, in Russia. The Russian bank will then inform RBI to reduce the same amount from Russia's bank account with the RBI.
The money debited from the VEB account will be kept by RBI and will be transferred to Ram's bank account only when the tea shipment finally reaches Putina.
Russia also wants India to link its Unified Payments Interface (UPI) with their MIR payments system for seamless use of cards issued by Indian and Russian banks after Visa and Mastercard. Also, Russia wants to set up a strong dedicated system to easily facilitate energy purchases from Russia.
However, it seems like the exchange rate that will be used is yet to be decided since the ruble has fallen drastically in the last one month. Russian Foreign Minister Sergei Lavrov is expected to arrive in India for a two-day visit on Thursday and Friday, after concluding a two-day visit to China.
Russian Central Bank officials are also expected to visit India next week to discuss the details. The Reserve Bank of India regularly meets with executives from its banking system to discuss matters including exposure to Russia and the risk of sanctions.