Russian funds in Indian rupee vostro accounts halve in the past 12-15 months as Russia invests, makes purchases

New Delhi: Funds of Russian companies parked in Rupee Vostro accounts in India have nearly halved in the last 12-15 months, with a significant portion being used to buy Indian securities, machinery and defence products, two people aware of the matter said.

Much of the money has been utilized in investments and payments during the last and ongoing fiscal, with the amount currently lying in the accounts around $3-3.5 billion, from a high of $8 billion a year ago, the people mentioned above said.

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The Vostro accounts were opened due to a lack of investment opportunities in India-Russia trade, continued volatility in exchange rates and challenges with fund repatriation following western sanctions over Russia's invasion of Ukraine in February 2022.

While the volatility in exchange rates and challenges with fund repatriation continue, a significant portion of the funds has now been used in purchasing Indian securities, machinery and defence products as Russian companies continue to look at newer avenues of investments, the first person mentioned above said.

"As things stand, Russian funds (in rupees) have also been invested in Indian government treasury bills since regulations do not allow such funds to be invested in corporate debt. However, it was difficult to specify the exact amount remaining in the Vostro accounts because of some complex transactions," the first person said.

Not a major issue

"The issues regarding the repatriation of money (from Russian exports) is not a major one anymore. They are now investing more in the Indian market due to the easing of regulations and are increasingly looking for new investment opportunities," the second person mentioned above added.

A Vostro account is managed by a domestic bank on behalf of a foreign bank. The foreign lender can use the account for transactions, including forex settlements, cross-border payments, and investments in the domestic market.

India's trade deficit with Russia stood at $57.17 billion in FY24, with exports at $4.26 billion and imports at $61.43 billion, higher than the $46.07 billion trade deficit reported in FY23 when exports stood at $3.15 billion and imports at $46.21 billion.

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According to the Commerce Ministry data, India's trade deficit with Russia stood at $17.06 billion during April-June 2024 (Q1FY25), with exports at $1.31 billion and imports at $18.36 billion.

Much of the skew in the trade deficit comes from increasing Indian purchases of Russian oil, offered at a discount following western sanctions. India overtook China as the world's biggest importer of Russian oil in July.

“With Western sanctions limiting Russia's ability to receive payments in dollars, it is exploring alternatives like investing in Indian securities or purchasing goods and services from India. Russia may choose to buy agriculture or industrial goods or bullion from India,” said Ajay Srivastava, who heads the economic thinktank Global Trade Research Initiative (GTRI). 

“However, India’s limited advanced electronics manufacturing capabilities make it unlikely that Russia can source cutting-edge technology from India,” he added. 

Oil imports soften

Meanwhile, oil imports from Russia softened during August due to lower demand.

According to Reuters, Russian crude made up a record 44% of India's overall imports in July, rising to a record 2.07 million barrels per day (bpd), 4.2% higher than in June and 12% more than a year ago.

However, sequentially, these imports were down—to 1.73 million bpd in August from 1.94 million in July.

Also read |  Russian exporters stuck with $8 bn in local Vostro accounts

The Reserve Bank of India approved 34 applications in 2023 of different Russian banks for opening rupee accounts with Indian banks to facilitate two-way trade in the backdrop of Western sanctions.

The rupee accounts have been opened by Russian banks in 14 Indian commercial banks, including UCO Bank, State Bank of India, HDFC Bank, Yes Bank, IDBI Bank, Punjab National Bank, Axis Bank and Canara Bank.

Spokespersons of the commerce ministry and the Russian Embassy (New Delhi) didn't respond to emailed queries.