Russia and India have always maintained a good economic and trade relationship, with extensive cooperation in areas such as energy, military, and space. The settlement of bilateral trade in rupees was once a method explored by both parties. However, recently Russia has suspended this plan. It is reported that the Russian side believes that holding rupees is "not cost-effective", with 300 billion Indian rupees turning into waste paper? So, what exactly led Russia to make such a decision?

Russia and India Suspend Negotiations on Rupee Settlement for Bilateral Trade

The settlement of India-Russia trade in rupees has been put on hold!

According to reports, two Indian officials stated that Russia and India have suspended negotiations on settling bilateral trade in rupees. The Russian side believes that if a rupee settlement mechanism is established, Russia will ultimately have an annual rupee surplus of more than 40 billion US dollars, which is absolutely "not cost-effective" for Russia.

40 billion US dollars in rupees, converted at a rate of 1 US dollar ≈ 81.7261 Indian rupees, means that Russia holds over 3 trillion Indian rupees.

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Regarding the trade between India and Russia, what is more widely known this year is that India has purchased discounted Russian oil in large quantities, settled in Indian rupees, not in US dollars.

The oil that India bought at a low price from Russia was then sold at a high price to other countries, allowing India to make a fortune in the trade of cheap Russian oil.

All of this stems from the Western sanctions on Russia. The reasons are clear: due to the Russo-Ukrainian war, the West has imposed severe economic sanctions on Russia, freezing Russian assets and excluding Russia from the international settlement system SWIFT.In addition, sanctions have been imposed on Russian oil, with the G7, the European Union, and others banning the use of Russian oil, natural gas, coal, and more!

These series of actions have led Russia to abandon the US dollar in trade settlements and to initiate the use of gas rubles!

As an emerging economy, India, and Russia, as one of the major energy-exporting countries, have become important partners in conducting economic and trade cooperation with India.

In trade, Russia, with its abundant resources such as oil and natural gas, has provided India with a large amount of energy and raw materials, while also importing many competitive products from India.

India has obtained a certain amount of foreign exchange income by exporting chemicals, pharmaceuticals, and other products to Russia, and has enhanced its national defense strength by purchasing weapons and other equipment from Russia.

India and Russia have been working hard to reach a free trade agreement to further expand bilateral trade.

After Russia adopted gas rubles, India also emphasized the need to use rupees to settle oil.

This is the background of India trading with Russia in rupees, and due to Western sanctions, India can obtain Russian oil resources through multiple channels, with the core being low-priced oil.

However, as trade cooperation between the two countries becomes more frequent, Russia also has a large amount of Indian rupees, and there is a huge trade surplus with India.

Correspondingly, due to sanctions from the US and the West, Russia has been looking for potential suppliers of products such as cars, aircraft, and train parts, manufacturing equipment, and pharmaceuticals, and with a large amount of rupees in hand, Russia is eagerly hoping that India can expand its exports to Russia.But India fears sanctions from the West and is unwilling to trade with Russia.

What does this mean? It means that the over 3 trillion Indian rupees held by Russia simply cannot be spent; their oil might be exchanged for a pile of worthless paper.

Could the 3 trillion Indian rupees in Russia's hands become worthless paper?

Why would the 3 trillion Indian rupees in Russia's hands become worthless paper? Why is this absolutely "not cost-effective" for Russia?

On one hand, Russia finds it difficult to import from India, and the rupees in its possession are hard to spend in the Indian market.

On the other hand, there is the inherent limitation of the rupee itself.

We know that among the world's currencies with a relatively high settlement ratio and free circulation, the highest proportion is the US dollar, followed by the euro, with these two having an extremely high share, and then come the pound and the renminbi, among others.

This also means that the global settlement and circulation of the Indian rupee are not good, and this is indeed the case; the rupee cannot be fully exchanged in many countries.

Firstly, the circulation range of the rupee is small, making it difficult to convert into other currencies.The circulation of the Indian Rupee is primarily concentrated within India, with relatively fewer instances of its use abroad.

India's share in global commodity exports is also only around 2%, which is the core reason for the low global settlement of the Indian Rupee.

If Russia wants to convert Rupees into other currencies, it would need to go through banks and other institutions for exchange, which is relatively costly and inefficient.

Secondly, there is an insufficient circulation of Rupees, with a prominent supply and demand contradiction.

Since the Rupee is only the currency of India and is not widely circulated in the international market, its supply is also relatively limited.

If Russia holds a large amount of Rupees, it would need to purchase financial products such as bonds issued by the Indian government.

It is said that India has also proposed to Russia to buy government bonds, but is Indian debt really worth buying? That is a question mark.

There are also risks with Indian government bonds; we say that buying government bonds often depends on the country's credit, economy, and fiscal strength.

Moreover, the interest rates on Indian government bonds are also quite high, reaching up to 6%, and sometimes even 7.5%-8%. Such high rates seem to promise good returns.

However, it is important to understand that the higher the return, the more likely there are hidden pitfalls. With such high rates, one would expect everyone to be eager to buy, but the reality is the opposite. This is because India has a high inflation rate, a current account deficit, and a long-term depreciation of its exchange rate, which is why the rating for Indian government bonds is not high.From this perspective, there is a question mark over Russia purchasing Indian government bonds.

Thirdly, the rupee's exchange rate fluctuates significantly, which can easily lead to exchange rate risks.

The rupee is the currency of India, and its exchange rate is influenced by various factors such as politics and economy, with relatively large fluctuations.

If Russia holds a large amount of rupees, it would have to bear the risks associated with exchange rate fluctuations. Especially when the rupee depreciates, Russia would face substantial losses.

In summary, Russia's suspension of negotiations on bilateral trade settlement in rupees is mainly due to considerations of India's inability to increase exports to Russia, the difficulty of spending rupees in India, the volatility of the rupee's exchange rate, its limited circulation, and the supply-demand contradiction.

Of course, from the above, it seems we can also see that Russia has been genuinely fooled by India this time, with real oil in exchange for Indian rupees that cannot be spent.

Which country could accept such a situation? Since a bilateral trade agreement cannot be reached, Russia has no choice but to take action and suspend negotiations on bilateral trade settlement in rupees!

This serves as a warning to China.

Faced with the dilemma in Russia's trade with India, we should also learn lessons, after all, we are a major trading nation.Take China's trade with India for example: In 2022, China's trade surplus with India broke the $100 billion mark.

This is much higher than Russia's annual $40 billion, and if we were to settle accounts in Indian Rupees as India does with Russia, it would pose a significant financial risk.

Therefore, in international trade settlements, we must avoid repeating Russia's mistakes when using Indian currency for settlements.

Some may also ask, since a country like India is extremely self-interested, why does Russia export cheap oil to India? In fact, we have already analyzed the Western sanctions against Russia earlier.

Moreover, India is also strategic in obtaining Russia's low-priced oil, and has taken a series of measures to reduce the cost of imported oil.

This includes reducing import tariffs and subsidies to state-owned oil companies. In addition, India has reached a mutual trade agreement with Russia to settle in local currencies, avoiding the impact of exchange rate fluctuations, thereby reducing costs.

Even India has adopted flexible market strategies and negotiation skills in importing oil.

The Indian Oil and Natural Gas Corporation, as the country's main oil importer, has strong bargaining power. To obtain better prices and favorable terms, the company has adopted a series of flexible market strategies and negotiation skills.

For example, bundling multiple orders into a single contract, or negotiating jointly with oil importers from other countries to obtain better prices and terms.

Therefore, Russia and India use Rupee settlement in oil trade, and in the end, they are the ones who are trapped.For Russia, it is still necessary to identify trade partners who can provide India with low-priced oil, but also to be vigilant!

After all, trade between the two countries is influenced by various factors such as the global economic situation and geopolitics, so trade relations also have a certain degree of fluctuation and uncertainty.

Of course, we must be highly alert, especially towards countries like India. We need to maintain a high sense of vigilance. India is very aggressive in developing its economy, and we must avoid our interests being damaged.

In addition to India, in trade with other countries, our products should not be exchanged for too many non-mainstream currencies. For example, in the Middle East, we should exchange for oil.

On the contrary, the risk of the Chinese yuan is not significant. Currently, many countries around the world have begun to use the yuan for settlement, and the process of internationalization of the yuan is also accelerating. Other countries trading with China will not suffer losses by using the yuan for settlement.

Just like after Russia was deceived by India this time, another Indian official participating in the discussion said:

Russia is unwilling to hold rupees and hopes to pay for bilateral trade in yuan or other currencies.

It can be seen that compared to the rupee, the yuan has more advantages and appeal. Of course, this is also an achievement of our continuous promotion of the internationalization of the yuan.

In summary, in foreign trade, on the one hand, we need to continue to promote the internationalization of the yuan. On the other hand, we must also be vigilant, especially towards countries like India and Europe and America, to avoid the lessons learned from Russia!