Russia sanctions: RBI, banks huddle up to draw strategy

Banks, led by SBI, have already indicated that they will not process any transactions involving Russian entities subject to international sanctions imposed on Russia after its invasion of Ukraine. However, while ongoing transactions will not be affected, fresh transactions will remain on hold, banking sources said. India exported $3.33 billion worth of goods to Russia in 2021, including goods like pharmaceutical products, tea and coffee. When contacted, SBI did not comment on the developments.

Government sources said the geopolitical developments would impact India’s import basket, and there may be a need to diversify sources of imports of certain commodities, especially petroleum products and agri commodities. However, the impact of sanctions movement of payments between Russia and India seems “manageable” at the moment despite trade in both US dollars and Euro becoming difficult, sources said. This is because there is always the option of conducting transactions in rupee, just like it was done when sanctions were imposed on Iran.

Trade with Iran was done via a rupee account maintained with UCO Bank, wherein Indian importers deposited payments in rupee in the vostro account of Iranian banks for importing oil. A similar system was used by Indian exporters to receive payments for Iran. It’s possible to have same kind of transaction mechanism in this case as well, sources said. The main concern, however, seems to be around a sharp spike in commodity prices, especially oil and gas due to this geopolitical crisis, which is expected to have a significant bearing on the Indian economy.

There’s also talk of revival of rupee payment system for trade with Russia. On the other hand, the RBI will have to tackle the impact of rising crude oil prices on retail inflation. RBI Governor Shaktikanta Das has already indicated that the renewed surge in international crude oil prices will require close monitoring as they pose a risk to domestic inflation.

Meanwhile, Commercial Indo Bank LLC, the lone Indian bank operating in Russia, is in the spotlight as the bank is a lead agent of the supporting organisations – State Bank of India and Canara Bank — that conducts operations with Indian companies that do business in Russia. SBI holds 60 per cent stake in the bank while Canara Bank holds 40 per cent. However, the impact of sanctions on Commercial Indo Bank is not clear.

According to rating firm ACRA, the bank’s liabilities include corporate deposits and interbank loans. Dependence on the largest depositors is relatively high, with the largest depositor / top 10 customers accounting for 38 per cent / 84 per cent of total liabilities. “The largest creditor is the embassy of the Republic of India and ACRA believes that the relationship between the Bank and this depositor is highly predictable,” it said.

As of March 1, 2021, the bank’s loan portfolio amounted to 6% of its assets. The largest portion of the assets is formed by Russian sovereign bonds and financial assets held with the Bank of Russia. ACRA noted the absence of problem loans (Stage 3 under IFRS9) in the bank’s loan book as of June 30, 2020. The guarantees portfolio stood at RUB 247 million as of June 30, 2020. The bank’s strategy includes organic growth of the loan book, expansion in mortgage lending, and higher volume of guarantees issued on government contracts, it said.