Post sanctions, Indian banks will have to deal with smaller Russian banks to route transactions, a senior bank official said on condition of anonymity.

The larger Russian banks like Sherbank and VTB have come under sanctions imposed by the US and its Western allies.

“Payments used to be undertaken from the Delhi branch of Sherbank. Now we are looking at smaller Russian banks that have been kept out of the sanctions to complete the transactions,” the bank official said.

One of the main tasks is to get back the $500 million of exporters’ receivables from Russia, which is stuck because of sanctions.

The Reserve Bank of India (RBI) recently met the officials of VTB, Sherbank and Gazprombank to work out a payment mechanism for trade between India and Russia.

The Indian government is also talking to the Russian government to find out a solution, which could be a rupee-rouble payment arrangement. Earlier, the trade between the two countries was conducted in dollars.

A depreciating rouble is a matter of concern and, with the war in Ukraine promising to be a prolonged affair, currency fluctuations are being weighed. With a falling rouble, there is also a fear that the Russian importers could default on their payments.

A rupee-rouble payment arrangement is being worked out between the government of India and the Russian government for items like defence and potash, a critical input for agriculture. “There are hardly any suppliers of potash globally. The challenge will also be the exchange rate, with the rouble already depreciating by 40% against the dollar,” said a bank official.

The rupee-rouble trade becomes easier if the Russian banks have branches in India as the local exporters and importers can make and receive the payments in the domestic currency. But the nature and range of sanctions make it complex and will have to be worked out with extra caution.

The rupee-rouble exchange is not something new that the government is exploring. This has its roots in the Indo-Soviet Trade Agreement signed between the two countries in December 1953, which said that all payments between India and USSR may be made in Indian rupees. However, the arrangement led to Russia being stuck with huge rupee balances as exports from India were a small fraction of their imports and the arrangement ended in 2005.

India is a net importer from Russia. While India imports about $6 billion mainly in form of oil, fertilisers, petroleum products and gold, Russia imports about $2.5 billion. And this does not include India’s defence purchases from Russia.