INDIAN VOODOO: How Russian banks are bypassing SWIFT sanction

Sanctioned Russian banks now have access to one of the world’s largest markets, due to a recent decision by the Indian government to permit cross-border trade settlements in rupees to promote Indian exports.

To settle trade deals under rupee trading, Indian banks have to open special rupee-vostro accounts in the trading partner country’s banks. The special rupee-vostro account is an account opened by a domestic bank to hold the holdings in rupees on behalf of a foreign bank.

The payment from the Indian importer is credited to a particular vostro account of the correspondent bank of the exporter’s country in India against the invoices for the supply of goods or services from the exporter. Similarly, an Indian exporter to a foreign country is paid the export proceeds in rupees from the balances in the designated special vostro account of the importer’s correspondent bank in India.

Although the exchange rate between the currencies of India and the foreign country is market-determined, all trade deals are denominated, invoiced and settled in rupees. Thus, it will bypass the Society for Worldwide Interbank Financial Telecommunications (Swift) messaging platform and other Western banking systems and allow India to trade with countries like Russia and Iran that face Western sanctions.

Recently, the Reserve Bank of India approved opening nine special rupee-vostro accounts of Russian banks with Indian banks, making Russia the first to open vostro accounts in India. India’s UCO Bank opened an account for Russia’s Gazprom Bank. Branch offices of VTB Bank and Sber Bank in India have opened accounts for their parent banks. IndusInd Bank will open the remaining six accounts.

Since the Ukraine war, India-Russia bilateral trade has soared to a record high, making Russia the seventh-largest trading partner for India. From April to August of 2022, Russian exports to India were worth $17.2 billion, while Indian exports to Russia accounted for a paltry $992 million, leaving a negative trade balance of $16.2 billion.

If rupee trading materializes, Russia will not be the only one to benefit. It will change the trade balance dramatically between India and Russia in India’s favor.