A high-level inter-ministerial group has been formed to examine a barrage of economic sanctions imposed by the West on Russia following its invasion of Ukraine and their likely impacts on India’s economy, an official familiar with it has said. of development.
As the Ukrainian conflict escalates, India has stepped up efforts to secure essential imports from Russia, especially potassium chloride (commonly known as muriate of potash), a key fertilizer, and sunflower oil (edible).
Led by Economic Affairs Secretary Ajay Seth, the high-level panel also includes senior officials from the Ministries of Food and Consumer Affairs, Fertilizer, Trade, External Affairs, Agriculture and Petroleum.
The panel is looking for ways to set up a bilateral rupee-ruble payment system to evade an unprecedented wave of sanctions against Russia, which has crippled the former Soviet state’s financial system.
“Formal talks with the Russians will be required to establish an alternative payment mechanism, but the government will be presented with various options after a full sanctions review,” the official quoted above said, speaking on condition of anonymity.
India fears that the disruption in the supply of murate of potash ahead of its main summer kharif season could hamper its agricultural sector, which is a major source of income for half the country’s population.
The Russian-Ukrainian conflict has already begun to hurt Asia’s third-largest economy, which had only begun to recover after a pandemic-induced recession in 2020-21. On Monday, the rupiah fell to a record low of 76.9, falling 1% against the dollar as oil prices soared.
At least $400 million in payments and claims from Indian exporters to Russia are now blocked because sanctions have cut off Russia’s ability to transact in dollars, the currency for international payments. Russian banks have been cut off from a global payments highway known as SWIFT.
The panel includes representatives from the Reserve Bank of India, which is seeking to nominate a small Indian bank with minimal exposure to dollar or euro transactions, where a Russian bank could open an account because sanctions do not prohibit a system rupee-ruble exchange rate, the official said.
India had successfully used a similar payment system to pay for oil imports from Iran when that country faced sanctions from the West. At that time, UCO bank was established as the main payment gateway.
However, an alternative payment mechanism is not easy to set up. While the idea is that a Russian bank will open a so-called “vostro account” in an Indian bank and both countries will deposit a certain amount to guarantee payments to importers and exporters, determining the ruble- ruble will be a key challenge.
“One of the reasons is that even though a ruble-ruble exchange rate is pegged to the dollar to determine a notional exchange rate, we have to keep in mind that the value of the ruble is continuously falling against the dollar,” said Amarendra Patil. , a trade economist who taught at the Indian Institute of Foreign Trade.
“It could make the payment system inefficient due to the continued erosion of one of the two currencies (the ruble),” he added.
The government, which reviewed fertilizer stocks last week, is looking for alternative suppliers to fill the gap with fertilizers at prices similar to those charged by the Russians.
According to official data, 11-11.5% of total imports of edible oils and fertilizers come from the Russia-Ukraine region. The two countries also account for more than 90% of sunflower oil imports. In a basket of fertilizers imported by India, Russia accounts for more than 17% of MOP (muriate of potash) and 60% of NPK (nitrogen, phosphorus and potassium).
“In response, the government is identifying alternative sources of supply for edible oils and fertilizers, although these are expensive,” said Sonal Varma, analyst at Nomura Holdings, a global financial advisory and securities firm. , in a research note.