Exporters in Russia, who started trading with India using Indian rupees, have recently spent nearly $4 billion to buy India-made defence equipment and armaments, among other imports and Indian securities. This amount come from funds which were lying idle in their Vostro accounts.
Till October, Russian exporters held about $8 billion in Vostro accounts. These accounts were set up to facilitate trade between Russia and India, using Indian rupees and are managed by a domestic bank on behalf of a foreign bank.
As per a latest report, due to a lack of investment opportunities in India, the money held in the Vostro accounts of Russian exporters remained unspent. In a mere six months, they used only about 50 per cent of these funds, the report quoted two people aware of the matter, who declined to be identified.
One of them said, “It is difficult to say the exact amount in the Vostro accounts since some transactions are very complex. However, during the last 6-8 months or so, a large part of the amount has been used.”
The Reserve Bank of India in July 2023 permitted 20 banks operating in the country to open 92 SRVAs of partner banks from 22 countries as part of efforts to promote bilateral trade in local currencies.
In a written reply to the Lok Sabha, Minister of State for Commerce and Industry Som Parkash also informed that an agreement was signed between the Reserve Bank of India (RBI) and the Central Bank of the UAE on July 15.
This would enable exporters and importers to invoice and pay in their respective domestic currencies, paving the way for the development of a bilateral foreign exchange market. A Vostro account allows a foreign lender for transactions, including forex settlements, cross-border payments, and investments in a different market.
Russia also uses the rupee from these Vostro accounts to import goods from India. India exports machinery, auto parts and other engineering goods to Russia. The Russian Vostro account started witnessing a large amount of rupee deposited in as India purchased increased amounts of cheap Russian crude oil following the sanctions imposed on Moscow by the West.
For the unversed, Russia is among the largest suppliers of crude oil to India. Russian funds (in rupees) have also been invested in Indian government treasury bills. As per regulations such funds are not allowed to be invested in corporate debt.
India is reducing dependence on Russian Arms and Ammunition
India — the world’s biggest arms importer — is drastically reducing dependence on Russian weapons, and is unlikely to make any new purchases from Russia. Earmarking $100 billion for future procurement, this now leaves a potential opening for Western arms manufacturers.
Over the last two decades, India spent $60 billion on weapons from Russia, but according to the latest report from the Stockholm International Peace Research Institute, the imports have been steadily declining, going from 76 percent in 2009–2013 to just 36 percent in the last five years — the first five-year period since the 1960s in which Russian defense exports “made up less than half of India’s arms imports.”
And according to Indian defense experts, the Ukraine war is set to accelerate the drop.
Indian’s Defence Manufacturing Sector is thriving
According to a report titled ‘India Defence’ by Nomura, India’s defence sector presents a substantial ordering opportunity of USD 138 billion between FY24 and FY32. With the rising demand for defence equipment, technologies, and services, there are promising prospects for companies involved in defence production and technology development. The report highlights that India’s defence capital expenditure is poised to surge to 37%.
