Rupee-rouble deal with Russia likely to be fortified after SWIFT freeze

The central government is planning to strengthen the rupee-rouble trade arrangement with Russia after the European Union, the US, and other Western partners decided to cut off several Russian banks from the global Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system.

On Saturday, European countries and the US decided to block many Russian banks' from accessing SWIFT, following Russia's assault on Ukraine. The move was intended to force a military pull-back, isolate and dessicate President Vladimir Putin’s ambitions of financing the war.

SWIFT is a secure messaging system that facilitates rapid cross-border payments and is the principal mechanism for financing international trade.

It was created in 1973 in Belgium. More than 11,000 banks and institutions in more than 200 countries are linked to the system. Five Russian banks are facing the ban, including state-backed Sberbank and VTB that make up around half of Russia’s banking assets.

"This will ensure these banks are disconnected from the international financial system and harm their ability to operate globally," European Commission President Ursula von der Leyen said after a videoconference with the leaders of the US, Germany, France, Italy, and Canada, adding that the war would also destroy the Russian economy.

Since the Narendra Modi government assumed office in 2014, trade in the rupee-rouble account has increased manifold. The move to sever Russia from SWIFT will have some consequences on India: it will disrupt trade with India, particularly fertilisers that are crucial for the country’s vast agriculture sector.

One way to deal with Russia is to reinforce the rupee-rouble account, advised bankers. According to them, the rupee-rouble account can be reactivated in these circumstances to soften the sanctions blow.

“The rupee-rouble account is there. It is a trade mechanism available to Russia,” said a senior banker.

Russia has already built a new system for payment messaging as an alternative to SWIFT. Called System for Transfer of Financial Messages (or SPFS), it is the Russian analogue to SWIFT developed by the Bank of Russia. Three times cheaper than SWIFT, the system has been in development since 2014, when the US government threatened to disconnect Russia from SWIFT.

Bilateral trade between Russia and India is at $9.4 billion so far this fiscal year, compared with $8.1 billion in 2020-21. Russia's exports to India are mainly oil, fertiliser, and rough diamonds, while India’s exports to Russia are pharmaceutical products, tea, and coffee.

There have been past examples of how India dealt with Western sanctions on its trade partners. In the aftermath of sanctions on Iran due to its nuclear programme in 2012, UCO Bank was designated as the payment bank for Iranian oil.

Kolkata-based UCO Bank was chosen because it did not have a foreign branch unlike its bigger peers like State Bank of India and Bank of Baroda. This made it less vulnerable to any repercussions from its involvement in the oil trade, processed in euros and rupees to avoid exposure to the US banking system.