$8 billion stuck in local Vostro accounts of Russian exporters – Gudstory

Some part of Russian money is invested in Indian securities, but most of it remains in Vostro accounts due to the lack of investment opportunities in India for Russians and the constant volatility in exchange rates.

“It is difficult to say the exact amount in Vostro accounts because some transactions are very complex. However, the figure is likely to be closer to $7-8 billion than $30-40 billion,” said the first person quoted above, who did not want to be named.

Vostro account is a bank account maintained by a domestic bank on behalf of a foreign bank.

The foreign bank can use its Vostro account to carry out transactions including foreign exchange settlements, cross border payments and investments in the domestic market.

So far, Russian funds (in rupees) have been invested in treasury bills of the Government of India, as such funds are not allowed to invest in corporate debt as per rules.

Mint reported on August 9 that about $10-12 billion of Russian funds have been invested in Indian government treasury bills in the year ending March 31, 2023, with a higher surplus in Vostro accounts due to an increase in the trade deficit.

Meanwhile, Russia is looking to invest in a variety of Indian government securities as sending money back is not an option at the moment, the second person said.

“Russia would ideally like to invest in new technologies. But, most of the intellectual property rights of these technologies are held by the West (especially the US). So, it is investing in government securities,” the person said.

The Reserve Bank of India (RBI) allows investment of excess balances from Vostro accounts in projects and investments, treasury bills and government securities.

However, experts say Russian investments are likely to be in short-term government securities, as their exporters would like to withdraw money lying in India as soon as possible.

“The yield differential between long-term bonds and short-term bonds like treasury bills is barely 30-50 basis points,” said Venkatakrishnan Srinivasan, managing partner at financial advisory firm Rockfort Fincap LLP.

Therefore, there is no point for Russians to invest in long-term government securities, as they would like to withdraw the money as soon as possible, Srinivasan said.

Since the start of the Ukraine–Russia war, Moscow has rapidly become India’s fourth largest exporter, driven mainly by its oil exports.

India’s imports from Russia increased almost five times to $46.2 billion in the last financial year. However, payment issues remain a stumbling block between the two countries.

Spokespeople for the Finance Ministry, Commerce Ministry, RBI and the Russian Embassy did not respond to queries.

During FY23, India had a trade deficit of $43 billion with Russia, leaving their exporters with large surpluses in their Vostro accounts in India.

Indian refiners are using a mix of currencies, including the yuan, to settle most of their Russian oil purchases. However, both countries were discussing trade in local currency, which has not yet started due to currency volatility and high trade deficit.

“At the moment, Russia cannot withdraw the money because the exchange rate is a challenge for them. Ajay Sahay, director general of the Federation of Indian Export Organizations, said dollar payments to Russia are possible through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) mechanism, which is blocked (for Russia).

“In addition, the entire Russian manufacturing has come under the sanction. So, even if an Indian company has the machinery required by Russia, they will not be able to supply because of the sanctions.”

The RBI has approved 34 applications from various Russian banks to open rupee accounts with Indian banks to facilitate two-way trade in the backdrop of Western sanctions.

Rupee accounts have been opened by Russian banks in 14 Indian commercial banks including UCO Bank, State Bank of India, HDFC Bank, Yes Bank, IDBI Bank, Punjab National Bank, Axis Bank and Canara Bank.

Shashank Mattoo contributed to this story.

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Updated: October 19, 2023, 12:07 am IST