On trade relations between Russia, China and India

17:27, July 11, 2023

Kazi Sohag described the pros and cons of using local currencies

Since February 2022, more than 11,000 sanctions have been imposed on Russia, including exclusion from the SWIFT system and freezing of Russian gold and foreign exchange reserves in the amount of $300 billion. One practice that Russia and its trading partners (mainly China and India) have adopted to minimize the negative effects of sanctions is to use local currencies to conduct transactions. Kazi Sohag, Associate Professor of the Department of Economics at Ural Federal University, spoke about the pros and cons of bilateral trade using the local currency. Using the example of the ruble-yuan and ruble-Indian rupee pairs, the expert explained how trading is going today and what can be done to improve it.

“Russian hydrocarbon exports have changed direction from Europe to Asia. Thus, the latest statistics from the General Administration of Customs of China show that from January to May 2023, the trade turnover between Russia and China reached 93.8 billion US dollars (by the end of this year it will reach 215 billion US dollars), which is 41% more than in 2022, and 85% more than in the first five months of 2021. The positive trade balance between Russia and China for the last five months of 2023 amounted to about $8 billion. Thus, at the St. Petersburg International Economic Forum, the President of Russia emphasized that Russia and China use rubles and yuan in 80% of trade settlements,” says Kazi Sohag.

The economist explains how mutual trade takes place in local currency: for example, Gazprom aims to sell crude oil to Sinopec. Gazprom must have a bank account with a Russian bank (probably Gazprombank), and Gazprombank must open a vostro account (an account held by a bank abroad in local currency.) with ICBC Bank of China in yuan. Similarly, the Chinese representative's bank may hold an account with a Russian bank in Russian currency and follow the same procedure.

Using the local currency for settlements is a realistic scenario, the economist believes, since imports and exports in Sino-Russian trade relations are symmetrical.

“It is likely that the practice of using the local currency can reduce the cost of the transaction compared to the SWIFT system. Such a system has several advantages. First, Russia has no other alternative. Secondly, this practice reduces dependence on the dollar, just as it reduces the global demand for the dollar (but only slightly). In addition, the practice helps to strengthen economic sovereignty, and other countries can follow the example of Russia and China. The main disadvantage is that Russian trade is highly dependent on China, so receiving a lump sum in yuan may not provide Russia with opportunities for effective convertibility,” Kazi Sohag concludes.

Russia's trade with India follows a different scenario. Unlike China with India, Russia has an asymmetric trade relationship.

“In particular, in the first quarter of 2023, Russia’s exports to India amounted to $15.5 billion, while India’s exports to Russia totaled only $946.6 million, which indicates the unilateral nature of trade. If rubles and rupees are used through vostro accounts for trade settlement, this means that Russian exporters hold a significant amount (approximately 14 billion, although this data is not confirmed) in rupees in their vostro accounts, ”explains the economist.

The question arises as to the efficient use of a large amount of rupees. It is unlikely that Russia can use this amount of rupees to import goods from other trading partner countries, since they may not accept rupees (at least for now), the expert argues. In addition, there may be legal barriers to converting the required amount into dollars or euros at the national level.

“As a possible solution to the problem, Russia required Indian importers to make payments in Chinese yuan. However, such an arrangement may not be in India's interests. First, India also seeks to strengthen the position of its currency in the global market. Secondly, despite the fact that China and India are members of the BRICS, they have some disagreements on territorial issues,” says Kazi Sohag.

As recommendations, the economist offers several points. First, Russia and India should consider possible measures to improve the balance of bilateral trade flows between the countries. Russian importers who buy goods from India may consider using vostro account rupees to facilitate trade. Second, India could consider investing in Western energy companies such as ExxonMobil, Shell and BP, thereby diversifying its energy portfolio. In addition, India may consider investing in the pharmaceutical industry in Russia, facilitating cooperation and knowledge sharing between countries. And, thirdly, the experts suggests exploring the possibility of introducing a single BRICS currency, given its potential positive impact on trade and economic cooperation between member countries.