Proposal of Russia–Bangladesh Trade in Indian Rupees

Proposal of Russia–Bangladesh Trade in Indian Rupees

General Studies Paper II: Bilateral Groupings, and Agreements

Why in News?

Recently, Russia proposed to set up bilateral Russia–Bangladesh Trade in Indian Rupees to bypass sanctions and expand regional trade.

Highlights of Proposal of Russia–Bangladesh Trade in Indian Rupees

Status: Russia has proposed settling bilateral trade with Bangladesh in Indian Rupees (INR) under RBI’s Trade Settlement Mechanism.
- The proposal is under review and no final decision has been taken.
- Bangladesh is carefully evaluating the proposal. India has not officially commented on the proposal.
Reason: The proposal aims to overcome payment disruptions caused by Western sanctions on Russian banks following the Russia–Ukraine conflict.
- Due to the sanctions, Bangladesh is unable to transfer loan repayments to Russia for the Rooppur Nuclear Power Plant.
  - The power plant is Bangladesh’s largest infrastructure project. It is being built by Rosatom with Russian financial and technical support.
  - The project has two VVER-1200 reactors of 1,200 MW each, giving a total capacity of 2,400 MW.
- Bangladesh is currently depositing the loan instalments into a Sonali Bank account opened in Russia’s name. However, the money cannot be transferred to Russia, leaving repayments unresolved.
- Before proposing the Indian Rupee, both sides explored settlement through the Chinese Yuan. That mechanism did not materialise.
- The Rooppur project is central to Bangladesh’s energy security. Uranium loading has already begun, and around 300 MW of electricity is expected to be supplied to the national grid on a trial basis soon. Timely financial settlements are therefore strategically important.
- The repayment issue affects broader Russia–Bangladesh cooperation, particularly in the civil nuclear sector. Using the Indian Rupee could provide an alternative settlement mechanism and ensure uninterrupted trade.
Payment Infrastructure: Russia has suggested creating a dedicated payment infrastructure.
- The plan includes opening a branch of a Russian bank in Dhaka to facilitate secure and efficient rupee-denominated transactions between the two countries.
- The Indian Rupee would act as the settlement currency for Russia–Bangladesh trade.
Benefits: If implemented, the proposal could reduce dependence on the US Dollar, lower transaction costs and ensure smoother bilateral trade despite global financial restrictions.
- The proposal highlights the broader trend of local currency trade, and strengthens regional financial cooperation.
Challenges: Major challenges include establishing a reliable banking mechanism, managing currency risks, and addressing concerns related to financial transparency.

What is INR Trade Settlement Mechanism?

Meaning: The INR Trade Settlement Mechanism is an RBI-approved system that allows international trade to be invoiced, paid and settled in Indian Rupees (INR) instead of foreign currencies like the US Dollar.
- It was launched in July 2022.
- It complements, rather than replaces, existing payment systems.
Objective: Its main objective is to promote global trade, reduce dependence on hard currencies, and support the internationalisation of the Indian Rupee.
Mechanism: The mechanism operates through a Special Rupee Vostro Account (SRVA). An Authorised Dealer (AD) bank in India opens this account for a foreign correspondent bank to facilitate INR-based trade settlements.
- When an Indian importer buys goods, payment is made in Indian Rupees. The amount is credited to the SRVA of the foreign bank, which settles import transactions without using a third-country currency.
- When an Indian exporter sells goods abroad, export proceeds are paid in Indian Rupees from the balance available in the SRVA, ensuring direct settlement in INR.
- In this mechanism, the exchange rate between the Indian Rupee and the partner country’s currency is market-determined, based on mutual agreement and prevailing market conditions.
- Surplus balances in the SRVA can be used for payments for projects, investments, advance trade payments, and investment in Indian Government securities and Treasury Bills, subject to RBI rules.
Approved Countries: 30 countries are connected to India’s INR Trade Settlement Mechanism through SRVAs, with 123 correspondent banks operating 156 SRVAs across 26 Indian banks.
- Countries including Armenia, Australia, Bangladesh, France, Germany, Israel, Malaysia, Maldives, Mauritius, Myanmar, Russia, and Nepal.
- This framework is open to any country, subject to RBI approval.

Key Developments in Rupee Internationalisation

Regional Payment Arrangements: India has strengthened regional financial integration through mechanisms such as the Asian Clearing Union (ACU), SAARC Currency Swap Framework, and UPI–PayNow linkage with Singapore, promoting wider cross-border use of the Indian Rupee.
Bilateral Local Currency Agreements: India has signed bilateral agreements to promote local currency settlement. Important examples include India–UAE and India–Indonesia frameworks, allowing trade and permissible financial transactions in domestic currencies.
Rupee–Rouble Arrangement: The Rupee–Rouble mechanism has been used in India–Russia trade to facilitate payments despite international sanctions. It supports trade continuity while reducing reliance on dollar-based settlement systems.
- India and Russia conduct 96% of their bilateral trade using national currencies, supported by an annual bilateral trade volume running at approximately $60 billion.
Masala Bonds: Masala Bonds are rupee-denominated bonds issued overseas. Introduced by the International Finance Corporation (IFC) in 2014, they attract foreign investment while transferring currency risk to overseas investors instead of Indian borrowers.
Free Trade Agreements (FTAs): India’s FTAs and Comprehensive Economic Partnership Agreements (CEPAs) encourage greater use of the Indian Rupee by expanding trade volumes, improving market access, and creating opportunities for local currency settlements.

Significance of Trade Settlement in Indian Rupees

Promotes Rupee Internationalisation: Trade settlement in Indian Rupees (INR) expands the global use of the rupee for trade, investment and payments. It is the first step towards making the INR an internationally accepted currency.
Reduces Dependence on the US Dollar: Settling trade in INR lowers India’s dependence on the US Dollar for cross-border payments. This reduces exposure to dollar shortages, exchange rate fluctuations and external financial shocks.
Improves Export Competitiveness: Direct settlement in INR lowers currency conversion costs and transaction expenses. This makes Indian goods and services more competitive in international markets and encourages export growth.
Enhances Economic Sovereignty: Local currency settlement strengthens India’s monetary autonomy. It improves resilience against geopolitical and financial disruptions.
Boosts India’s Global Economic Influence: A widely accepted Indian Rupee enhances India’s position in the evolving global monetary system. It increases India’s bargaining power in trade, finance and international economic governance.
Supports Long-Term Strategic Goals: Trade settlement in INR advances de-dollarisation, supports Atmanirbhar Bharat, and contributes to India’s vision of becoming a leading global economic and financial power.

Frequently Asked Questions (FAQs):

1. What is the proposal to settle Russia-Bangladesh trade in Indian Rupees?
Russia proposed settling bilateral trade and loan repayments with Bangladesh in Indian Rupees (INR) instead of the US dollar.

2. Why is the proposal currently under review?
Bangladesh is assessing its financial, legal, banking and sanctions-related implications before taking a final decision.

3. How would Rupee-based trade settlement work?
Payments would be made and settled in Indian Rupees through designated banking arrangements instead of US dollars.

4. Why are countries exploring alternatives to the US dollar in trade?
To reduce sanctions risks, lower transaction costs, and decrease dependence on the US dollar.

5. What role does India play in this proposed trade mechanism?
India provides the Indian Rupee and banking framework enabling settlement, without being a direct trading party.

6. How could this proposal benefit Russia and Bangladesh?
It enables uninterrupted payments, supports bilateral trade, and helps overcome sanctions-related banking restrictions.

Disclaimer: Information in this article is based on official announcements and public records. Regulations and implementation details may evolve over time.