Andy Mukherjee

India Shouldn't Fall For Putin's Rupees-For-Rubles Deal

India wants to go on trading with Russia for reasons that are more practical than to swipe at the West. For one thing, New Delhi relies heavily on Moscow for defense procurement, a dependency that will be hard to shed overnight with new suppliers. For another, Russia is reportedly offering India a $35 discount per barrel on the pre-war price of flagship Urals grade oil. Cheap energy imports can help Prime Minister Narendra Modi put a lid on rising domestic discontent with high pump prices.

The stance won't exactly please the Americans. However, it's no more opportunistic than Europe continuing to buy Russian gas more than a month into President Vladimir Putin's invasion of Ukraine. India may still end up testing US and European Union tolerance if it agrees to rupee-ruble trade using Russia's communication channel SPFS to move funds. That direct challenge to Washington will not be in New Delhi's own longer-term interests.

SPFS is what Moscow has proposed to the Modi government, according to Bloomberg News, as a way to deliberately short-circuit SWIFT, the messaging system used by banks to move money across borders.

SWIFT is a critical surveillance tool: Global banks can be slapped with hefty fines if transaction messages show the involvement of a sanctioned entity. Losing access to SWIFT would itself be a punishment because of the system's ubiquity. Additionally, if it's a dollar payment and the settlement occurs in New York- under an arrangement known as CHIPS- then the US can inflict more serious damage, including putting offenders in jail.

In the long run, Washington has to reimagine this policing power by supplementing- or even supplanting- the reigning trinity of SWIFT, CHIPS and the US currency with something better and faster, such as a digital dollar designed for use by the entire world. Right now, though, President Joe Biden has to thwart attempts by geopolitical rivals to smash the status quo before he has had a chance to define, and lead, the post-SWIFT era in global payments. If the world's 11th largest economy succeeds in bending sanctions, then China, the second biggest, will surely be able to break them at will.

It's easy to see why Moscow may want India to bypass SWIFT. Access to the Brussels-based network has been cut off for key Russian lenders, with the exception of Sberbank PJSC and Gazprombank, which the Europeans need to conduct energy trades. The question is, what does New Delhi get in return for this accommodation, besides cheap oil and military hardware like batteries for the S-400 air defense system? Nothing much, actually. If anything, it has much to lose.

Deals like this are often short-lived. They lack the deep liquidity provided primarily by the dollar, a medium of exchange and store of value all counterparties freely accept- unless they happen to be in Russia, where even the central bank has lost access to much of its foreign reserves. Without liquidity, trade shrivels up. For instance, India bought oil from Iran under a US sanctions waiver by depositing rupees in Indian banks. Tehran used these funds to buy food and medicine from India. However, once the waiver lapsed, India had to stop importing Iranian oil. The balances in the accounts dwindled, and now Indian firms won't sell Tehran rice, sugar or tea because they may not get paid.

At least the trade with Iran was entirely in rupees. SPFS is mainly a system for domestic Russian use. Since it's being proposed in cross-border trade, we can assume that Moscow will provide messaging log-ins to a couple of Indian banks. They may open accounts with lenders in Russia, and the favor would be returned. Russian exporters will very likely get rupees paid into their banks' accounts in India. Once transfer messages move on SPFS from New Delhi to Moscow, the Russian banks' head offices will give these exporters, principally state-linked firms, rubles. Messages and claims will flow the other way for Russian imports from India.

The exchange rate will be important. Back when India conducted commerce with the Soviet Union along similar lines, an "extremely complex system of currency and commodity coefficients" used to be at play behind the scenes to determine how much a ruble was worth, according to a March 1990 paper by the Indian economist Pronab Sen. Soon, however, the USSR collapsed, India got embroiled in a balance-of-payment crisis, and suddenly both parties wanted what neither could print: dollars.

Even if bureaucrats leave the exchange rate to markets this time, it's unclear how financial claims arising from trade will eventually be balanced: India imported almost $9 billion worth of goods from Russia last year, but exported only a little more than $3 billion. At the national levels, the numbers involved may be peanuts; but they will be significant for the banks facilitating this trade.

If the EU succumbs to Putin's ultimatum to "unfriendly" states and lets its gas-buyers pay in rubles, using accounts at Russian banks, there will be nothing exceptional about India doing something similar. But to take the lead in adopting a brand-new institutional arrangement with Moscow makes little sense from a geopolitical perspective.

The US considers a democratic India to be its potential ally in its superpower rivalry with China. It's not yet a deep relationship, and requires trust-building on both sides. It's one thing for New Delhi to abstain from condemning Putin's aggression at the United Nations, and quite another for it to abet his regime in avoiding sanctions. Agreeing to open a separate financial email channel with Moscow will make India look unreliable to far bigger economies whose markets it needs to move up from a low-middle-income status to high-middle. This transition is much more vital to its national interests than a $35 discount on oil or a favorable deal on weaponry.