Collateral Damage of Sanctions: Russia to Switch Gas Invoicing to Roubles for Europe

Date:

India has already traded with Russia under the Rouble-Rupee exchange agreement for many decades during the Cold War era. 

Many Indian businesses and retailers, in collaboration with the RBI, are seriously considering setting up joint Indian RuPay-Russian Mir card payment systems.

Ismail Y Syed

DAYS ago, a former top Forex trader colleague at HSBC Global Banking and Markets who is now a monetary economist at a think tank, remarked that following Russian Central Bank’s dollar asset freeze order by the US, it is only a matter of time before Russia is forced to go for trading with the West in rouble or joint rouble-yuan currency mechanism only. This move though potentially inflationary with monetary related risks associated with it, will ensure 100% risk-free transactions to avoid sanctions and asset freezes.

In fact, Financial Times reported that Russia was seriously considering trading gas with Europe in roubles only or as President Vladimir Putin puts it, “The collective West has killed all trust in their currencies.”

India, one of the major economies and the world’s largest democracy has already traded with Russia under the Rouble-Rupee exchange agreement for many decades during the Cold War era. Post-Cold War it has been trading on a limited scale but this would consolidate further after being placed with US sanctions in 1998 following its nuclear test (more later).

Indian banking and finance lawyers privately concede that India’s Finance Ministry, along with Reserve Bank of India (RBI) and Bank of Russia, is “racing against time” in exploring options to “internationalise” SPFS – the Russian equivalent of SWIFT, starting with Russia cross –border banking pilot scheme (which is being helped by the fact that India has some reservations in dealing with China’s CIPS – the Chinese nearest, although not exact, version equivalent of SWIFT – though India is ready to accept expansion of China’s UnionPay card payment system across certain platforms subject to restrictions).

Many Indian businesses and retailers, in collaboration with the RBI, are seriously considering setting up joint Indian RuPay-Russian Mir card payment systems – the latter is already proving to be popular in the emerging markets including Turkey and UAE – “within national payment infrastructures as well as on interaction of Unified Payments Interface (UPI) and the Faster Payments System of the Bank of Russia (FPS)”, according to an Indian official who wishes to remain anonymous to enable Russian citizens to trade with/buy products from India and vice versa at both consumer and SME level. In fact, there are reports that Russia’s SberBank has rolled out instant Mir cards for foreign visitors to Russia, available at designated branches.

As for international trade with Russia, emerging markets including Turkey, Malaysia, Bangladesh, Argentina, Venezuela, Iran, Saudi Arabia, UAE, South Africa and many AU countries, not to mention China, all have (or are formally planning to have) rouble and respective local currency exchange agreements in place. A number of lawyers based at Indian corporate law firms in Mumbai say that since the outbreak of the Ukraine war “they have been working around the clock” to convince a number of African Union to enable rouble-based trades. They are currently advising many of the corporations and conglomerates based in emerging markets on setting up rouble-based contracts.

India has an extensive experience in trading with Russia under rouble-rupee exchange agreements/and or rouble–rupee swaps and over the recent decade its increasing reliance on rouble-rupee exchange agreements. However, notwithstanding this, Indian corporate law firms are advising many large corporations based in the emerging markets to evaluate their governing contract and arbitration clause options and to seriously consider other major jurisdictions available as alternative to London, New York, Paris and Singapore, with the options of Dubai and Hong Kong being on the table among others.

Corporate law firms in India’s financial capital Mumbai say that the government of India with the help of the country’s leading members of the legal profession is also seriously considering to view current Russian-Ukraine crisis as “either or never” opportunity for India to emerge as future international arbitration centre alternative to London, Paris, New York, Singapore and Switzerland and evaluate whether it can become alternative to London and New York as governing law service providers for English law or New York law respectively, by using India’s well established English common law system, though this is likely to take some time (since well established Dubai’s DIFC court, Singapore and Hong Kong provides a tough competition).

On another note, an Indian lawyer said they along with Hong Kong and Dubai based lawyers are advising banks in South Africa, Bangladesh, Pakistan, and African Union member countries alongside Bank of Russia in exploring options to consider rolling out/enable cross-border joint Russia’s Mir and China’s Union Pay systems in the said countries’ retail and commercial banking services, as well as to roll out rouble-based foreign currency (“FCY”) accounts for retail and SME wishing to open rouble-based (or alongside limited capacity renminbi yuan) FCY fixed deposit schemes for the purpose of sending their children to Russia for education and medical treatments, given that Ukraine is out of the equation for many due to the war.

Till recently, Russia, Ukraine, Belarus and Georgia – after the West, Turkey and the Far East – were considered among the most attractive cheaper alternatives for studying abroad for medicine and STEM subjects for middle class citizens from the emerging markets (while students from affluent middle class and upper class segments continue to prefer western countries for higher education).

Time will tell whether rouble internationalises or not, but this author believes, based on discussions with experts and stakeholders, it is very unlikely that “mainstream internationalisation” of rouble would ever materialise in the near future other than limited overseas expansion, mainly among countries belonging to the emerging markets group. For a currency, and even that of an emerging market as opposed to developed country, to gain widespread acceptance globally, both country’s stock exchange and liquid markets’ accessibility and dependability for international markets (or at least emerging markets) are necessary alongside participation and investments from the developed economies such as the west and Japan, is almost necessary, all of which unlikely to happen anytime soon so long as sanctions remain in place.

This is also not helped by the fact that the country (Russia) is not an attractable or desired destination for foreigners looking to emigrate for permanent settlement; neither the Kremlin has a competitive pro-immigration policy in place that is comparable to other countries popular for immigration, other than for occasional asylum seekers fleeing the law enforcements abroad or unskilled workers from developing countries seeking employment. In currency markets, when other things being equal in determining wider acceptance and international demand for the country’s currency (in this case Russian rouble), international perception and common belief about the country—often helped, though not always, through country’s soft power, diplomacy and PR—also play a sizeable factor. Being a popular tourist destination and a desired place to emigrate/and or seeking employment are also among the factors that can tip the scale in favour of the country’s currency popularity. Even China, being an economic superpower struggles to gain such advantage for its renminbi/yuan currency, let alone comparatively smaller major economy like Russia.¹

However, an important point worth noting is many international lawyers and policy advisors believe that even if Ukrainian crisis were to come an end sooner than expected, and sanctions are lifted (which is very unlikely), from now onwards Russia and the countries from the emerging markets would not solely want to bet on the dollar or West’s hard currencies. At the very least, the emerging market countries, including Russia and China, would want to diversify their trading and international finance options in order to hedge themselves against being held hostage to West’s foreign policy-driven sanctions.

In fact, this has already started to happen even before the outbreak of the war with developing countries such as Bangladesh already initiating to diversify away from US dollar assets. One Indian diplomat couldn’t have been more blunt enough when he said the glass ceiling of never-ending trust on Western hard currencies has finally been shattered with the confiscation [freeze] of Russian central bank’s dollar asset; it was really a “big bang” moment. It wasn’t a matter of “if” but “when”.

A Saudi government official who is well connected with Saudi Central Bank officials summed up with a witty remark terming sanctions on Russia as “9/11 moment for petrodollar market”.

For China, there’s an additional factor, and that is even if there is considerable international demand for its yuan currency, the Chinese authorities would still prefer to limit internationalisation of yuan. They would rather prefer keeping the yuan under phased internationalisation as against a full-scale internationalisation. This is partly because of its preference to keep the current artificially undervalued export oriented economy.

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Ismail Y Syed, a columnist/op-ed contributor, is a scholar with interest in religion, philosophy, politics and international law. He can be followed on Twitter @IsmailYSyed

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