India’s stumble on rupee trading holds a lesson on globalization

Soon after Russia invaded Ukraine in February 2022, the US had imposed sanctions on it. Given that a large part of international trade is carried out in US dollars, with sanctions, it became difficult for Russia to do so. At that point, India reportedly began exploring a mechanism by which Indian importers could pay for Russian imports in rupees, which would help India get around the American sanctions on Russia.

Further, rupee payments would help Indian importers save money by not having to convert rupees into dollars for payments. This plan involved Russian banks opening vostro accounts with Indian banks. Indian importers could make rupee payments into these accounts, which could then be used by Russia to buy stuff from India.

So, why did things not go as planned? In 2022-23, Russia was India’s fourth largest import partner, with a total of $46.5 billion worth of goods imports. Petroleum and petroleum products worth $34.3 billion were imported. Coal and fertilizers were the other major imports. This was a consequence of Russia attacking Ukraine and driving up global commodity prices. In the case of oil, India got a better deal from Russia than other countries.

That same year, Russia was India’s 36th largest export destination with total exports of $3.2 billion. So, Russia ran a $43.3 billion trade surplus, meaning that India had much more to buy from Russia than vice versa. This explains why billions of rupees are lying unused.

Such a situation would normally never have arisen, given that the trade would have been carried out in dollars. So, the Russian trade surplus would be in dollars and those dollars could be used to pay for buying stuff from other countries, since a good chunk of global exports are priced in dollars. If not that, the dollars could be converted quickly into another currency like the euro and be used to pay for stuff. Or simply, the dollars could be invested in dollar assets like US Treasury bonds to earn a rate of return. Currently, the trouble is that there are limitations given the American sanctions on Russia.

Further, other countries are unlikely to accept Indian rupees from Russia for payment of purchases, simply because like Russia, what will they do with these rupees? In 2021, total global exports (goods and services) stood at $27.9 trillion, whereas India’s exports stood at $679.7 billion, or 2.4% of global exports. Hence, there is very little that other countries can buy from India and they really don’t need rupees.

This also tells us what India needs to do for the rupee to be taken more seriously in international circles. We need to export more, so that other countries can use rupees to buy stuff from India.

At a broader level, there are a few points that need to be made here. First, whether we like it or not, the structure of the global economy is such that it’s very difficult to carry out any significant amount of international trade without invoicing in dollars. Second, despite the recent criticism of the ‘exorbitant privilege’ that the dollar enjoys, thanks to it being the premier international currency, history shows us that different currencies have enjoyed a similar privilege at different points of time. Before the US dollar, the British pound, the Dutch Guilder and the Spanish dollar had an exorbitant privilege.

In fact, if there is one currency that importers and exporters are ready to accept, it makes international trade

easier. As Ray Dalio writes in Principles for Dealing with The Changing World Order: “In the late 1500s, around 800 different foreign and domestic coins circulated in the Netherlands, many of which were debased and difficult to distinguish from counterfeits. This created uncertainty over the value of money, which made international trade slower and more expensive." As the Dutch Guilder emerged as a premier international currency, this problem was solved.

Third, the presence of a premier international currency allows countries to run trade surpluses and deficits with each other, and at an aggregate level as well. As economist Michael Pettis puts it: “[A] global economy without the U.S. dollar—or some unlikely alternative… also would be a global economy in which large, persistent trade… imbalances are impossible." This comes out in what is happening in the Russia-India case.

Also, imagine a world without a premier international currency. How would countries like China in the past two decades (or Japan, South Korea, etc, earlier) have run trade surpluses by exporting more than they import, pulling millions out of poverty in the process?

To conclude, a recent Reuters news report said that “Russia is not comfortable holding rupees and wants to be paid in Chinese yuan or other currencies." India will be uncomfortable making payments in yuan. Paying in any other currency too will have issues around how much money can be converted without impacting the exchange rate. The rupee accounts for just 1.6% of global foreign exchange transactions. Clearly, we haven’t heard the last on this issue.

Vivek Kaul is the author of ‘Bad Money’.