Ukraine crisis: Payments stopped, Russian firms pressure Indian banks

Banks await RBI, govt's advisory on transactions with Russian companies

Financial transactions between India and Russia have come to a grinding halt after Indian banks stopped remitting funds to firms for their exports even as Russian companies put pressure on the lenders.

Most of the payments to Russian companies that are due are for defence-related items. Indian banks are forced to stop sending funds to Russ­ian exporters after the Eur­opean Union and the US and other western partners cut off Russia from the SWIFT system.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is an instant messaging system that informs users when payments have been sent and received. Created in 1973 and based in Belgium, Swift links 11,000 banks and institutions in more than 200 countries. Five Russian banks are facing the ban, which includes state-backed Sberbank and VTB — that make up around half of Russia’s banking assets. Both have branch presence in India.

“There is pressure from Russian companies for payment. But the US decided to block many Russian banks’ access to the SWIFT, so if we make payment from here in US dollar, it will not go through as the US will block any payments to Russia,” said a senior official from a large bank adding that most of the payments that are due are for defence-related imports into India.

Bankers said payment made by one of the public sector banks to a Russian firm on Monday was returned by the US.

According to bankers, volumes of payments typically increase in March before the closing of accounts. “This year is no exception. As we are in March, these companies are asking for payment. Most of the payments are for defence-related items. The amount would be substantial,” the official added.

Bankers said they are awaiting direction from the Reserve Bank of India on how to deal with Russian banks and firms. While banks have been asked by the regulator to furnish details of their exposure to Russia and Ukraine, there has been no communication from them so far since the sanctions were imposed on Russia in the last few days.

Bankers said the only way to resolve the deadlock is to open bilateral trade in rupee-rouble. The rupee-rouble trade needs to be revived, they said.

Bilateral trade between Russia and India stood at $9.4 billion so far in this fiscal year, as compared to $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 examples from the past on how India dealt with such western sanctions on its trade partners. In the aftermath of sanctions on Iran due to its nuclear programme in 2012, UCO Bank was designated by the India’s government as the payment bank for Iranian oil.

Kolkata-based UCO Bank was chosen because it did not have a foreign branch unlike many other big Indian banks like State Bank of India and Bank of Baroda, which 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.

Bankers said in the current situation at UCO or any other bank which does not have a foreign presence can be designated for the purpose of making payments. Bankers said risks are much lesser if such a bank invites US or western sanction.

Interestingly, Russian Ambassador-designate Denis Alipov on Wednesday said he does not see any hurdle in the supply of the S-400 missile systems to India because of the Western sanctions against Russia following their Ukraine invasion.

Clearly, Russia sees no reason for their trading relations with India to be disrupted because of the Western sanctions.