The Grammar Of Commerce In A New Age Of Geopolitics

Relevance: GS2- Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests. Effect of policies and politics of developed and developing countries on India’s interests

(Source: The Hindu, 08/09/2023)

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Why in the news?

• The author, Sunanda Sen, former professor at JNU, has discussed the role and impact of currencies in geopolitical ties in the article “The Grammar Of Commerce In A New Age Of Geopolitics” published in the Hindu on 9th August 2023.
• There is a marked trend of countries attempting to settle trade through their domestic currencies without having to rely on the currencies of the advanced economies of the West such as the dollar.

Use of Rupee in International Settlements: A Response to Geopolitical Developments

• In the aftermath of the Russian invasion of Ukraine in 2022, sanctions imposed on Russia by the United States and the European Union targeted the assets of Russian financial institutions.
• This seriously impacted Russian exports to India, which is one of its largest markets.

Rupee-Driven Transactions

• An alternative mechanism for settlement of payments between India and Russia was chosen in which the Indian rupee was used for bilateral trade.
• Special accounts called Rupee Vostro accounts to help manage payments between India and Russia were opened in Russian banks and managed by authorized Indian banks. 
  • Indian importers are required to pay in rupees from India's authorized banks against invoices from Russian suppliers.
  • Indian exports could also be paid for in rupees through similar accounts.
  • This approach is applicable to goods such as mineral fuels, crude oil, and defense systems.

Challenges and Solutions in Rupee-Based Transactions

• Russia continued to amass a trade surplus ($3.42 billion in 2020-21) despite global challenges.
• Russia was reluctant to hold an excess of Indian Rupees as the rupee is relatively lower-ranked in the global currency hierarchy and is subject to depreciation.
• These problems faced by India in arranging payments impacted the sustainability of the mechanism.
  • The sanctions had made it impossible for India to use the U.S. dollar or the Euro to settle payments to Russia.
  • Russia’s exclusion from the SWIFT network further hindered it from making and receiving international payments.
  • Similarly, the volatile exchange rate of the rouble made purchasing it for payment settlement impractical.

Yuan as an Alternative and Historical Parallels

• Indian refiners and importers resorted to using the Chinese Yuan for settling payments with Russia, a measure accepted due to Russia's robust trade links with China. 
• In the 1950s, India had analogous bilateral trade agreements with the Soviet Union, resembling inter-war clearing systems in Europe. 
• These arrangements facilitated closed rupee accounts for transactions, including merchandise and credit, handling loans and trade proceeds. 
• Concerns over suitable currencies for trade surpluses mirrored the past, as consistent surpluses persisted. However, the 1971 dollar floatation and Soviet Union's fragmentation concluded the India-Soviet Agreement.

Problems regarding use of Yuan

• Russia approves yuan for settling surpluses in rupee accounts.
• Opposition in BRICS to yuan use among members.
• Proposal for BRICS clearing arrangement on China's surpluses fails.
• Geoeconomic climate fosters local currency settlements; e.g., rupee-dirham pact between India and UAE encompasses trade, remittances, and capital flows.
• Aids risk reduction, curtails India's dollar reliance for oil and mineral imports.
• Facilitates efficient payment systems benefiting the Indian diaspora in UAE (3.5 million).
• India is discussing akin rupiah agreement with Indonesia.
• Such arrangements save hard currencies despite possible loss of faith in ruble.

Broader Geoeconomic Shifts in South-South Trade Relations & New Financial Architecture

• There is an evident shift in the geo-economic and political approaches of countries of the global South.
  • This is evident in the preference for using the local currency in transactions by India (rupee), Russia (rouble), China (yuan), the UAE (dirham), and Indonesia (rupiah).
  • They are prioritizing trade and settlement of payments without using hegemonic currencies from the advanced economies of the global North.
• The evolving financial landscape signifies a shift towards a fairer global economy, possibly diminishing the roles of institutions like the IMF and World Bank. 
• Despite challenges from political variations and currency inequalities, geo-economics could outweigh geopolitics, facilitating the transition to this new financial structure.

Conclusion

• The shift in currency usage in international trade is a significant indicator of how countries are adapting to emerging challenges and asserting their economic autonomy. 
• As capitalism continues to guide economic interactions, the emergence of a new financial architecture indicates the beginning of a transformation.
• The unfolding changes in South-South trade relations can reconfigure the global economic landscape leading to a more balanced and cooperative international trade environment.

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FAQs

MCQs

Question: The problem of international liquidity is related to the non-availability of (UPSC CSE 2015)

(a) goods and services

(b) gold and silver

(c) dollars and other hard currencies

(d) exportable surplus

Question: The transition towards local currency transactions among nations of the global south suggests:

(a) A decline in international trade cooperation.

(b) A shift towards barter-based trade arrangements.

(c) The beginning of a new financial architecture.

(d) An increased reliance on advanced economies' currencies.