Russia has accumulated billions of rupees in Indian banks that it cannot use, according to Foreign Minister Sergey Lavrov, pointing to a growing trade surplus with the South Asian country.

“This is a problem,” Lavrov told reporters in  Goa on the sidelines of the Shanghai Cooperation Organization meeting. “We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now.”

According to data from the Ministry of Commerce and Industry,

India’s total exports to Russia fell 11.6% to $2.8 billion in the first 11 months of the fiscal year 2022-23, while imports nearly fivefold to $41.56 billion. This surge occurred as refiners snatched up discounted Russian oil that had previously been shunned by the West in response to President Vladimir Putin’s invasion of Ukraine.

According to Vortexa Ltd, a data intelligence firm, India’s imports of Russian crude reached a record 1.68 million barrels per day in April, up sixfold from the previous year.

Following sanctions against Russian banks and a ban on transactions using the SWIFT messaging system, the Kremlin initially encouraged India to trade in national currencies.

However, due to the ruble’s volatility shortly after the war began, plans for a rupee-ruble mechanism for oil imports were abandoned. Since the invasion of Ukraine, India has resisted US pressure to cut ties with Moscow.

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‘Frozen Assets’

The trade imbalance for Russia means that “the volume of ‘frozen funds’ can reach tens of billions of dollars,” according to Alexander Knobel, director of the Ministry of Economic Development’s Institute of International Economics and Finance. “The situation is exacerbated by India’s historically large aggregate trade deficit, which limits the options for clearing settlements with third countries.”

Russia is India’s largest supplier of weapons and military hardware, but defence supplies to the South Asian country have been halted due to a lack of a non-US sanction-compliant payment mechanism.

Payments from India for weapons worth more than $2 billion have been held up for nearly a year because New Delhi has been unable to settle the bill in dollars due to concerns about falling foul of secondary sanctions, while Russia is reluctant to accept rupees for purchases.

Oil refiners have been attempting to settle payments for discounted crude in UAE dirhams, rubles, and rupees. Trades can be exempted from international restrictions if they are priced below the Group of Seven nations’ and European Union partners’ $60-per-barrel price cap.

To facilitate overseas trade in rupees and keep crude flowing, the lenders opened special vostro accounts at Russian banks such as Sberbank PJSC and VTB Bank PJSC.

Currency restrictions make it difficult for Russian exporters to repatriate rupees, according to Bank of Russia Governor Elvira Nabiullina on April 28.