The grammar of commerce in a new age of geopolitics

Source– The post is based on the article “The grammar of commerce in a new age of geopolitics” published in “The Hindu” on 9th August 2023.

Syllabus: GS2- International relations

News – Since March 2018, 23 advanced and developing countries have agreed for currency swap arrangements with India, extending credits in settling transactions.

How an unexpected shift in the utilization of the Indian rupee for international transactions occurred after the Ukraine-Russia conflict?

Sanctions on Russia directly targeted the assets of Russian financial institutions. This situation posed a significant challenge for both Russia and India.

To address this, an alternative approach was adopted for settling payments between the two nations. It involves the utilization of the Indian rupee in trade-related transactions.

The payments originating from either India or Russia are now directed to Rupee Vostro accounts established in Russian banks by authorized dealer banks in India. These accounts are responsible for facilitating the settlement of payments between the two countries.

How India-Russia alternate payment arrangement is facing challenges?

Russia is continuing with a trade surplus. In 2020-21, it amounted to $3.42 billion, followed by similar surpluses in the following years.

Russia is reluctant to hold more of the Indian rupee as an asset in the Vostro account. The rupee has a low rank in the global currency hierarchy and may be subject to depreciation.

Indian refiners have settled some payments for Russian oil imports using the Chinese yuan. It seems to be acceptable to Russia.

How similar payment arrangements were made in the past?

India established comparable bilateral trade and clearing agreements during the 1950s.

India and the Soviet Union engaged in bilateral trade agreements that involved the establishment of a closed rupee-denominated account. This account was utilized to manage both the exchange of goods and credit-related transactions between the two nations.

This initiative was initiated in the 1950s when the Soviet Union established a steel plant in Bhilai, despite opposition from Western nations.

The Soviet Union experienced a consistent buildup of trade surpluses. The decision to float the dollar in 1971 resulted in turbulence within the currency market and also affected the Soviet rouble.

The situation became more complicated due to the fragmentation of the former Soviet Union, which left Russia as a separate entity.

How is the current situation different from the past?

The geopolitical situation is different from the past. Presently, Russia is not averse to obtaining yuan for the management of its surpluses within the existing rupee account.

However, historical evidence indicates a reluctance within the sphere of BRICS for non-Chinese members to utilize the Chinese currency.

This hesitance became apparent during a proposition to create a clearing system among BRICS as a response to China’s persistent and sizable surpluses. Regrettably, this proposal did not come to fruition.

What are other similar alternate payment settlements systems related to using local currencies?

India and the United Arab Emirates have rupee-dirham arrangements.

This arrangement covers various transactions including trade, remittances, and capital movements.

It allows India to circumvent dollar payments for its imports of crude oil and minerals from the UAE. The agreement outlines provisions for linking their payment and messaging systems, enabling swift and cost-efficient money transfers.

Efforts are also underway to negotiate a similar agreement with Indonesia, utilizing the rupiah for transactions with India.

How a new financial architecture is emerging?

Indian rupee, Russian rouble, Chinese yuan, UAE dirham, and even Indonesia’s rupiah are aligned towards the shared objective of localized currency transactions.

Southern nations are preparing to engage in trade and payment settlements among themselves. They want to move away from the use of dominant currencies.

This trend will circumvent the need to rely on institutions from advanced countries, such as the International Monetary Fund, the World Bank, and private capital, at least for the purpose of settling their bilateral transactions.

There are challenges stemming from political disparities and the differing standing of currencies. However, geoeconomics could potentially surpass geopolitical obstacles and help bridge these differences.

It signals the early stages of a novel financial structure. Currencies of Southern nations are going to replace the longstanding hegemonic and exploitative system enjoyed by the currencies of the North.