By Yatharth Thumar
The Reserve Bank of India made a daring move on July 11th, 2022, allowing local traders to settle their imports and exports in Indian rupees. The decision to internationalize the INR is significant because it may enable India to conduct business with Russia without the assistance of American banks. This action has two benefits, on the one hand, it may open up new economic opportunities for us with countries like Russia, Iran, and Venezuela. And on another end, it will kill the US dollar's supremacy in global economics and take Aatmanirbhar Bharat one step closer. Nevertheless, this action would ruin our relationships with both the US and Europe. Therefore, this is a significant effort by India to lessen its reliance on the western bloc. So questions might arise, what is India's approach to implementing this system? In spite of Western resistance, how will this assist us to trade with Russia, Iran, and Venezuela? What sort of issues may India encounter? How would it help the Indian economy grow?
We must first determine the reason behind RBI's abrupt decision to permit the settlement of overseas trades in INR. This is due to the American sanctions that excluded Russia from the Swift network when it invaded Ukraine. And this has presented India and many other nations with a number of trade issues. Understanding how the current Swift network operates and how the US and Europe very deftly coerced world commerce with sanctions in the name of world peace and moral policing are prerequisites for understanding this RBI approach.
Various parties are involved in the Swift network, including Indian traders, Indian banks, American banks, international banks, and foreign traders. The Indian bank will have an account with the American Bank where it will keep its money in dollars. In a similar vein, the foreign bank will keep its funds in US dollars in an account with an American bank, because only US banks are permitted to hold dollars. For this reason, almost all international banks maintain accounts with US banks where they keep their funds in US dollars.
Let's imagine an Indian trader wishes to do business from a distant nation. In such a case, the trader would pay an Indian bank X amount and request the bank to transfer the same amount to the foreign trader's account in the US. As a result, the Indian Bank would send instructions to its dollar account in the US to transmit the equivalent amount of dollars to foreign banks' dollar accounts in the US. Now that the money is in that country's US account, it will send a message to a bank there instructing it to pay the trader an identical amount.
This system requires a lot of communication between different banks and lot of calculation to be done, due to fluctuation in exchange rates and more importantly, it requires a complex network of thousands of banks from all across the world. Therefore, it is managed by a highly sophisticated messaging network called the Swift Network. And this network is very heavily controlled by both the US and Europe. Upwards of 50% of the international trades are accomplished through the swift messaging system solely. So the question is what is an issue with this system? And why is the RBI attempting to build a substitute?
Three issues exist with this system. Firstly, since Europe and the US are in control of the overall system, if they don't like you, they'll apply sanctions and disconnect you from the swift network. In other words, they won't allow you to trade via the Swift system. And this is exactly what the West did to Iran. Second, refusing to let you trade could still be allowed, but because the US controls all of the world's dollar accounts, it might also be possible for it to freeze any funds that are stored in those accounts.
And this is what happened to Russia; 300 billion dollars worth of its foreign assets were blocked following the invasion of Ukraine. Russia hence is unable to do trade using its own money. And lastly, this system is very costly since all parties involved in the system, take a commission, and the cost of transferring money itself costs you anywhere between 1 to 5%.
If India wishes to trade with Russia, even if this has nothing to do with the invasion of Ukraine by Russia, the West will resist. India is unable to trade with Russia. And what's worse is that it's not as though Europeans have ceased doing business with Russia because they understand that their economies would collapse if they do not have Russian gas. In order for Europe to continue using Russian gas and serve as the moral police of the globe, they have established exclusions so that certain Russian accounts will be permitted to run. In the name of the moral police and world peace, the west uses its so-called dominance in this way to obstruct trade with other nations.
India has developed a different way to get around the swift system and continue doing trade with other nations, by permitting the use of Indian rupees in overseas trade. As you can see from the RBI notification, this is possible using a Vostro account. A Vostro account is a bank’s account held by a foreign bank. Therefore, any nation that wishes to conduct business with India without using a third party can open a bank account with an Indian bank and maintain a balance in rupees. Therefore, anytime a trade occurs, the fees on both sides will be subtracted before the remaining funds are transmitted. This is the expected format change for the transactions.
India will have two advantages that might change the game and one significant threat if this approach is implemented. The fact that India would be allowed to trade with Russia is the first benefit. With a 13 billion dollar annual trade deficit with Russia, which is one of our largest trading partners, we can purchase items at less cost. Second, in addition to Russia, we might begin doing trade with Iran and Venezuela, two nations that the US has sanctioned. This would be advantageous because both of these nations have previously expressed interest in using the system. The United Arab Emirates has further expressed interest.
Therefore, this technique will greatly aid us in reducing our reliance on dollars. The notion that we are directly threatening the dominance of Uncle Sam's dollars poses the biggest threat to us. As a result, the United States won't be thrilled about it and may threaten to implement sanctions or even try to bring down this system.
The author is currently pursuing his bachelor's in Defence and Strategic studies at the School of Internal Security, Defense, and Strategic Studies at Rashtriya Raksha University. Views expressed are personal.