Unwanted foreign reserves
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File picture of a currency printing plant in Sri Lanka.
Russia has accumulated billions of Indian rupees last year and now doesn’t know what to do with that. Last week it was reported that the Indian rupees that Russia has amassed through its bilateral trade with India is equal to US$147 billion by the end of 2022. It was also reported that India’s attempt to convince Russia to keep the money as “foreign assets” in Russian coffers has failed too. And finally, the inconclusive bilateral talks between the two countries on the issue also came to a halt.
The story that I am unfolding today is an interesting one. As Sri Lanka may also shift its bilateral trade with India from US dollars to Indian rupees, the issue has a particular relevance to Sri Lanka too. Before we turn to Indian rupees together with Russian rubles or Sri Lankan rupees, let’s begin with the US dollar itself.
Fortune of the US
The fortune of the United States is that it can print dollars, give them to any other country in the world, and import what they want. Therefore, the US doesn’t have to worry about the country’s trade deficit, at least for now. The last time that the US had a trade surplus was in 1975. Since then, the country has been having a growing trade deficit. During the past 20 years it grew surpassing $500 billion every year and reached $1 trillion in 2022.
But no worries! The US can print dollars which would be accumulated by others by their own choice, then borrow the same dollars from them, and finance its trade deficit. Almost every country in the world has lent to the US by investing in US bonds. While the US government’s total debt amounts to over $30 trillion, which is about 130 per cent of GDP, the biggest lenders to the US are Japan, China, UK, Belgium, and Luxembourg.
Over 80 per cent of world trade is in US dollars, while over 60 per cent of the world’s foreign reserves are in US dollars. Because of the international demand for dollars, which is also growing along with expanding trade flows and money flows including debt flows, the US must ensure an ever-increasing supply of dollars. Nevertheless, international demand for US dollars also prevent the problem of dollar depreciation against other major currencies.
Well, here is the crux of the matter: No country should worry about earning and accumulating dollars, because there is world demand for that. It is rather the international strength of a country to keep amassing dollar assets which can be used whenever it wants. The country can spend in dollars, invest in dollars, lend in dollars, and make more dollars, but it doesn’t matter wherever and whenever it happens.
De-dollarisation attempt
As we have discussed in this column recently, there is an attempt particularly by the BRICS countries to promote their own currencies which might weaken the dominant position of the US dollar. The western sanctions against Russia limiting its payments in US dollars through the SWIFT code, compelled Russia also to promote its own currency, Russian ruble.
Given its higher trade and growth performance in the recent past, India too tried in making the Indian rupee going global. In July 2022, the Central Bank – the Reserve Bank of India – allowed the settlement of international trade in Indian rupees for 18 countries including Germany, Israel, Malaysia, New Zealand, Russia, Singapore, Sri Lanka, and the UK.
Since the outbreak of the Russian-Ukraine war and the imposition of western sanctions against Russia, India saw an economic opportunity which it quickly exploited. Russian oil that has been hit by western sanctions can be bought now at a cheaper price. Then it can be refined in India, and sold to Europe at a higher market price in order to make a profit.
It was beneficial to Russia, of which its oil exports to Europe have come under European sanctions against Russian exports. The new arrangement benefited all – India to benefit from Russian sanctions, Russia to trade-off its losses from European markets, and Europe too not to buy oil from Russia, but from India!
Accordingly, India was said to have increased its oil imports from Russia 10-times last year. In 2021 Russian oil accounted for just 2 per cent of India’s annual crude imports, which stood in 2022 at about 20 per cent of total imports, as reported by the BBC. Russia became India’s largest oil supplier ousting both Iraq and Saudi Arabia.
India’s crude oil imports from Russia have been around one million barrels a day in 2022. By the end of the year, India and Russia made the first settlement of their trade in Indian rupees, resulting in a bilateral trade surplus equivalent to $147 billion in favour of Russia.
Rupee-Ruble trade
When Russia agreed to receive payments in Indian rupees, India doesn’t have to earn US dollars or any other international currency but settle the payments to Russia in its own currency. Here is the problem: After settling the payments in both directions, Russia is left with a huge surplus of Indian rupees; in fact, as it was reported Russia has been piling up about $1 billion worth Indian rupees every month.
If it was a dollar-surplus, there are plenty of opportunities anywhere in the world. But what can Russia do with an Indian rupee surplus, with which there are little opportunities around the world?
Russia does not import much from India, while the main imports included pharmaceuticals, chemicals, machinery, electric and electronics, and food and beverages. But each import category in this list is worth less than half a billion dollars a year, while total exports accounting for less than three billion dollars in 2022. Russia doesn’t want anything more so that the Indian rupees cannot be used to buy anything else from India.
Neither can Russia use Indian rupees to buy anything from any other country, because the Indian rupee has not yet emerged as an internationally accepted currency in the world. Other options that may have been discussed between the two countries must be Russian investments in Indian capital markets or infrastructure projects in India. But it seems that such negotiations have come to a halt without much success.
Besides, unlike in the case of US capital markets, Indian capital markets are not globalised or liberalised as yet, while the Indian rupee too is highly volatile in the international financial system.
India – Sri Lanka trade
This means that unless and until bilateral trade is balanced at the end of the day, the options for settling down payments in Indian rupees is not an easy option for Russia. Although the arrangement has helped India to avert its dollar outflows and Russia to sell its oil and coal, the rupee-ruble trade is unlikely to continue further.
If there are other countries in India’s list which do trade with both Russia and India and which do agree to receive payments in Indian rupees, Russia can solve the problem of unwanted foreign reserves. This means that unless and until many countries join with their trade and financial transactions in a new currency like the Indian rupee, there are difficulties of settling the issue.
Sri Lanka is also included in India’s list of countries announced last year to settle payments in Indian rupees. However, the India – Sri Lanka case is totally different, because bilateral trade between the two countries results every year in a trade deficit for Sri Lanka.
Sri Lanka’s total exports to India were only about $860 million in 2022. More than a quarter of Sri Lanka’s imports have been from India, amounting to $4.7 billion. Therefore, being a country with a bilateral trade deficit with India, even if Sri Lanka receives payments in Indian rupees, in the present context it won’t be any issue for Sri Lanka. Perhaps, the problem may be that Sri Lanka has to earn more Indian rupees to settle bilateral transactions.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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