Economist Speaks About Russia's Trade Relations with China and India

10:43, July 18, 2023

Kazi Sohag described the advantages and disadvantages of using local currencies

Since February 2022, more than 11,000 sanctions have been imposed on Russia, including exclusion from the SWIFT system and the freezing of Russia's $300 billion foreign exchange reserves. One of the practices that Russia and its trading partners (mainly China and India) have resorted to in order to minimize the negative impact of sanctions is the use of local currencies for transactions. Kazi Sohag, Associate Professor of the Department of Economics at the Ural Federal University, spoke about the advantages and disadvantages of bilateral trade using local currencies. Using the example of the ruble-yuan and ruble-Indian rupee pairs, the expert explained how trade is conducted today and what can be done to improve it.

"The direction of Russian hydrocarbon exports has changed from Europe to Asia. For example, according to the latest statistics from China's General Administration of Customs, in the first five months of 2023, trade turnover between Russia and China reached $93.8 billion (it will reach $215 billion by the end of this year), which is 41% more than in 2022 and 85% more than in the first five months of 2021. Russia's trade surplus with China in the last five months of 2023 amounted to about $8 billion. Thus, at the St. Petersburg International Economic Forum, the Russian President emphasized that Russia and China use rubles and yuan in 80% of trade settlements," says Kazi Sohag.

The economist explains how mutual trade in local currency takes place: for example, Gazprom wants to sell crude oil to Sinopec. Gazprom needs to have a bank account with a Russian bank (probably Gazprombank), and Gazprombank needs to open a vostro account (an account maintained by a foreign bank in local currency - editor's note) with ICBC Bank of China in yuans. Similarly, the Chinese agent's bank may have a vostro account with a Russian bank in Russian currency and follow the same procedure.

Using the local currency for payments is a realistic scenario, the economist believes, because imports and exports are symmetrical in Sino-Russian trade relations.

"It is likely that the practice of using local currency can reduce the cost of a transaction compared to the SWIFT system. Such a system has several advantages. First, Russia has no alternative. Second, the practice reduces dependence on the dollar, just as it reduces global demand for the dollar (but only slightly). In addition, the practice strengthens economic sovereignty, and the example of Russia and China can be followed by other countries. The main disadvantage is that Russian trade is heavily dependent on China, so receiving a lump sum in yuan may not provide Russia with the opportunity for effective convertibility," Kazi Sohag concludes.

Trade between Russia and India follows a different scenario. Unlike China, Russia's trade relations with India are asymmetrical.

"Specifically, in the first quarter of 2023, Russia's exports to India totaled $15.5 billion, while India's exports to Russia totaled only $946.6 million, indicating the one-way nature of the trade. If rubles and rupees are used through vostro accounts for trade settlements, it means that Russian exporters have a significant amount (about 14 billion, although this data is not confirmed) in rupees in their vostro accounts," the economist explains.

The question arises as to the effective use of such a large number of rupees. It is unlikely that Russia can use such a large amount of rupees to import goods from other trading partners, as they may not accept rupees (at least for the time being), the expert argues. In addition, there may be legal obstacles to converting the required amount into dollars or euros at the national level.

"As a possible solution to the problem, Russia has demanded that Indian importers make payments in Chinese yuan. However, such an arrangement may not be in India's interest. First, India is also trying to strengthen the position of its currency in the global market. Second, despite the fact that China and India are BRICS members, they have some disagreements over territorial issues," Kazi Sohag says.

The economist makes several recommendations. First, Russia and India should consider possible measures to better balance bilateral trade flows between the countries. Russian importers buying goods from India could consider using rupees from the vostro account to facilitate trade. Second, India could consider investing in Western energy companies such as ExxonMobil, Shell and BP to diversify its energy portfolio. India could also consider investing in Russia's pharmaceutical industry, which would facilitate cooperation and knowledge sharing between the two countries. And thirdly, the expert suggests exploring the possibility of introducing a single BRICS currency, given its potential positive impact on trade and economic cooperation between the member countries.

Anna Marinovich

The news article was translated by UrFU International Marketing Office. 
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