Trade settlement: Govt says banks free to not deal with sanctioned entities

The Centre has told banks that they can exercise their commercial discretion and not deal with sanctioned entities, particularly in the case of Russia, while settling international trade in rupees, people aware of the matter said.

Banks had reached out to the government and the Reserve Bank of India (RBI), expressing their fear that the rupee trade mechanism could result in economic sanctions on them by the West.

Bankers had met top government officials in the Ministry of External Affairs on August 9 and conveyed their apprehensions about the mechanism. During the discussion, the officials allayed their fears, stating that they were free to not deal with entities transacting in sanctioned items or those on whom sanctions have been imposed.

Banks fear that their balances in nostro accounts (those that a bank holds in a foreign currency in another bank) will be frozen and that will be a big hit. So they must facilitate only those transactions that do not result in such consequences, the government has told them.

Banks have been told to deal with their Russian counterparts untouched by sanctions, and those that have not been blocked from the SWIFT system. They have been told there must not be any issues in transacting with non-sanctioned banks.

There are over 200 banks in Russia, and sanctions have not been imposed on all of them, said a person quoted above. Banks will be able to transact with many entities that are untouched by such restrictions, he added.

Some of the Russian banks that have not been sanctioned reportedly include Tatsotsbank, Zenit Bank, and Petersburg Social Commercial Bank, among others.

“Banks have the right to not trade with any sanctioned entity or commodities. This is an operational issue for banks to decide which entities they want to deal with, depending on their risk appetite. It is banks’ commercial decision to assess transactions and undertake only those that fit their risk appetite,” one of the persons cited above said.

The Centre is of the view that the rupee settlement mechanism is not just targeted for trade with countries like Russia and Sri Lanka, but “more of a statement from a sovereign for internationalisation of its currency in the long term. This would substantiate India’s efforts towards inclusion of INR in the IMF’s currency basket,” the person said.

While in the short term, as India is witnessing a slowdown in demand from its key export markets — United States and Europe — amid fears of a recession, the department of commerce hopes that the rupee trade arrangement will boost trade with sanctions-hit Russia and countries grappling with a forex crisis such as Sri Lanka.

India’s dependence on cheap or discounted Russian crude oil has also been on the rise since March. In the April-June quarter, Russia became the third-largest crude oil supplier to India, after Iraq and Saudi Arabia, government data showed.

India imported goods worth $4.23 billion in June from Russia, up 6.8 times as compared to last year.

Trade trouble

• Banks fear that their balances in nostro accounts will be frozen
• Banks have been told to deal with Russian entities untouched by sanctions
• They can decide which entities they want to transact with, depending on their risk appetite
• Centre sees the rupee settlement system as a step towards internationalising rupee