Indian and Russia have a problem caused by the SWIFT sanctions that have, in effect, made it impossible for Russian banks to use dollars. The issue is that trade is booming, and Russia is running a $30bn trade surplus with India, of which some $20bn is from the ballooning sales of crude oil to Indian refineries.

Russia's exports to India reached $35bn last year, but the country only imported about $5bn worth of Indian goods. With Indian rupees piling up in Russian accounts, India doesn't produce much that Russia wants to buy and as the rupee is only partially convertible, New Delhi can’t convert its rupees into dollars to send to Russia.

As a result, billions of dollars worth of rupees that belong to Russia are stuck in India, and neither side can find a way to turn them into something more useful like goods, gold or yuan.

It was one of the items on the agenda for talks between Russian Foreign Minister Sergei Lavrov and his Indian counterpart India's External Affairs Minister Dr Subrahmanyam Jaishankar at the Shanghai Cooperation Organisation (SCO) foreign ministers summit in Goa last week, as they are not making any progress.

“This is a problem,” Lavrov told reporters in India’s Western state of Goa. “We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now”.

Reuters, citing Indian government sources, announced the suspension of negotiations on trade in rupees between Moscow and Delhi on May 4 after the Indian side "tried everything they could to try to make it work."

Imports of Russian crude by India reached a record 1.68mn barrels per day (bpd) in April, up sixfold on a year earlier, according to Vortexa Ltd, a data intelligence firm.

The Kremlin initially encouraged India to trade in national currencies following sanctions on Russian banks and a ban on transactions using the SWIFT messaging system.

But volatility in the ruble soon after the war began meant plans for a rupee-ruble mechanism for oil imports were abandoned. India has resisted pressure from the US to scale back relations with Moscow since the invasion of Ukraine.

However, New Delhi is working hard to find a fix by opening “Vostro” and “Nostro” accounts with central banks around the world. These are special accounts that allow India to convert its rupees into other currencies and are largely used to facilitate its international trade. As bne IntelliNews reported, they are part of the way that India is actively trying to de-dollarise and settle more trade deals in its own currency, as are Russia and China in theirs.

 

How do they work?

The Reserve Bank of India (RBI) has given permission to Russian banks to open special rupee Vostro (Latin for “to or for your”) accounts at Indian banks that will enable rupee-based export-import transactions to take place between India and Russia.

As most Russian banks are now logged out of SWIFT, which facilitates and confirms cross-border payments, both India and Russia are looking for alternative ways to continue trade and transfer money internationally.

A Vostro account is an account that an Indian bank holds on behalf of a foreign bank and is in rupees. For example, a Nostro account has been set up by the State Bank of India (SBI) for the use of HSBC.

In this arrangement HSBC will act as a financial intermediary in transactions. HSBC provides services such as executing wire transfers, performing foreign exchange, enabling deposits and withdrawals, and expediting international trade on behalf of India’s SBI.

No interest is paid on deposits in a Vostro account and an overdraft is available only in special circumstances.

From the point of view of HSBC whose rupees are held in the account of SBI, this account is known as a Nostro (“to or for our”). HSBC will hold nostros in all of the major trading currencies round the globe in the countries of the respective currencies, so dollars in New York, yen in Tokyo, sterling in London, etc. For Indian banks, therefore, Vostro accounts contain only rupees, whereas Nostro accounts are maintained in foreign exchange currencies.

The Vostro accounts enable Indian banks to offer international banking solutions to domestic customers without opening a bank branch in other countries. Rupees can be paid into the SBI  into the Vostro that HSBC can then in effect turn into dollars. 

Since RBI's decision to allow Russian banks to open Vostro accounts in Indian banks, this is a step towards the expansion of rupee-based export-import transactions between India and Russia, but the problem of a lack of available dollars or other hard currencies remains and the extreme mismatch in the trade balance is also a serious problem that has to be solved.

So far, 20 Russian banks have been permitted by Reserve Bank of India to open Special Rupee Vostro Accounts (SRVA) for import-export transactions. For example, one of the things that Vostro accounts allow is for the invoicing of foreign trade transactions, which is all done in rupees. A Russian bank with a Vostro account can invoince its India counterparty, who will pay rupees into the Vostro account, allowing for Russo-India trade to be settled in rupees. The problem then is how to convert those rupees into, say yuan or dirham, that can be deposited in the Nostro accounts at the Russian bank. 

Amongst the Russian banks with Vostro accounts are:

- UCO
- Sber
- VTB
- IndusInd
- Rosbank
- Tinkoff
- Centro Credit
- Credit Bank of Moscow