Funds from Russian companies held in Rupee Vostro accounts in India have almost halved over the past 12-15 months. A significant portion of these funds has been used to purchase Indian securities, machinery, and defence products, according to two informed sources.

Much of the money has been allocated for investments and payments during the last and current fiscal years. According to the sources, the amount currently in the accounts is approximately $3-3.5 billion, down from a peak of $8 billion a year ago.

The Vostro accounts were established in response to a shortage of investment opportunities in India-Russia trade, ongoing volatility in exchange rates, and difficulties with fund repatriation following Western sanctions imposed on Russia after its invasion of Ukraine in February 2022.

Although exchange rate volatility and challenges with fund repatriation persist, a significant portion of the funds has been utilised for purchasing Indian securities, machinery, and defence products. According to the first source, this shift reflects Russian companies' efforts to explore new investment avenues.

"As things stand, Russian funds (in rupees) have also been invested in Indian government treasury bills since regulations do not allow such funds to be invested in corporate debt. However, it was difficult to specify the exact amount remaining in the Vostro accounts because of some complex transactions," the first person said.

"The issues regarding the repatriation of money (from Russian exports) is not a major one anymore. They are now investing more in the Indian market due to the easing of regulations and are increasingly looking for new investment opportunities," the second person mentioned above added.

A Vostro account is managed by a domestic bank on behalf of a foreign bank, which can use the account for various transactions, including foreign exchange settlements, cross-border payments, and investments in the domestic market.

India's trade deficit with Russia reached $57.17 billion in FY24, with exports totalling $4.26 billion and imports at $61.43 billion. This is an increase from the $46.07 billion trade deficit reported in FY23, when exports were $3.15 billion and imports were $46.21 billion.

According to data from the Commerce Ministry, India's trade deficit with Russia was $17.06 billion during April-June 2024 (Q1FY25). During this period, exports amounted to $1.31 billion, while imports totalled $18.36 billion.

The significant skew in the trade deficit is largely attributed to rising Indian imports of Russian oil, which is offered at a discount following Western sanctions. In July, India surpassed China to become the world's largest importer of Russian oil.

“With Western sanctions limiting Russia's ability to receive payments in dollars, it is exploring alternatives like investing in Indian securities or purchasing goods and services from India. Russia may choose to buy agriculture or industrial goods or bullion from India,” said Ajay Srivastava, who heads the economic thinktank Global Trade Research Initiative (GTRI). 

“However, India’s limited advanced electronics manufacturing capabilities make it unlikely that Russia can source cutting-edge technology from India,” he added. 

Meanwhile, oil imports from Russia declined in August due to reduced demand.

According to Reuters, Russian crude accounted for a record 44% of India's total oil imports in July, reaching 2.07 million barrels per day (bpd). This was a 4.2% increase from June and 12% higher compared to a year ago.

However, these imports decreased sequentially in August, dropping to 1.73 million bpd from 1.94 million bpd in July.

In 2023, the Reserve Bank of India approved 34 applications from various Russian banks to open rupee accounts with Indian banks, aiming to facilitate two-way trade amidst Western sanctions.

These rupee accounts have been established by Russian banks at 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.

Spokespersons from both the Commerce Ministry and the Russian Embassy in New Delhi did not respond to emailed queries.

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