How India is circumventing US sanctions to grow trade with Russia

Russian exports to India are booming despite wide-ranging sanctions by the US-led West on Moscow for attacking Ukraine two years ago.

Sanctions limit a country’s ability to trade with the outside world. Once sanctioned, a business or bank can’t make transactions in major currencies or use SWIFT, the mainstay of the global payments network that banks rely on to process cross-border trade.

But thanks to the use of currencies other than the dollar or the euro, Russia has now become the second-biggest exporter to India—a marked change from two years ago when Moscow barely made it to the top 25 trading partners of New Delhi.

Russian exports to the world’s fifth-biggest economy grew six-fold in just two years, from less than $10 billion in 2022 to over $61 billion in the 2024 fiscal year ending in March.

“They have clearly worked out a very serious mechanism… The governments in both countries are not really coming out very clearly [to say] exactly how these transactions are taking place,” says Dr Gulshan Sachdeva, professor and Jean Monnet Chair at the Centre for European Studies in New Delhi.

On the one hand, New Delhi has defied the US by maintaining trade ties with sanctioned Russian entities. By doing so, it has risked an economic blowback from the US, India’s biggest trading partner.

On the other hand, New Delhi has helped Moscow minimise the fallout of the sanctions by purchasing its crude oil in large quantities. Along with China, India has played an instrumental role in Moscow’s economic survival since the start of the Russia-Ukraine war in February 2022.

How is India circumventing sanctions?

Payments for up to 70 percent of all Russian exports to India are handled by Sberbank, the largest bank in Russia. The state-owned lender is under Western sanctions and can’t carry out transactions in either dollars or euros.

US sanctions on Moscow are mostly unilateral as opposed to the ones imposed by the United Nations, which require mandatory compliance from all UN members. Historically, India has never recognised US sanctions on a third country.

Indian banks circumvent the US sanctions by using the Indian rupee instead of the dollar to pay for imports of Russian goods, mainly crude oil.

In 2022, India’s central bank allowed a handful of banks to open special accounts to facilitate rupee-based trade with Russia.

Yet, an Indian bank dealing with a US-sanctioned Russian entity faces a real risk of getting cast out of the global financial system with a single stroke of pen by a mid-level American bureaucrat.

Dr Sachdeva tells TRT World that only two “relatively low-profile” Indian banks— the public sector UCO Bank and IndusInd Bank in the private sector—are taking the biggest exposure to Russian trade.

“They do not have much exposure or branches anywhere in the West. So they’re not really worried [that] they can come under secondary sanctions,” he says.

In other words, US and European authorities have little leverage to punish the two banks India has unofficially fenced off for dealing with sanctioned Russian entities.

Rupee surplus with Russian banks

Trade between India and Russia is heavily skewed. India imports more than $61 billion of Russian products – mainly crude oil – annually, while its exports hover around a meagre $4 billion.

Given that India prefers to pay Russia in rupees, it’s obvious that Russian banks end up with loads of Indian currency.

But unlike the dollar that’s universally accepted as a medium of exchange, there are few takers of the Indian rupee outside of India.

The difficulty of converting the Indian rupee into dollars makes the spurt of bilateral trade “unsustainable” in the long term.

According to Dr Sachdeva, the two countries are using a multi-pronged strategy to make the best of the rupee-build up with Russian banks.

Russian banks can use only a small chunk of the trove of Indian rupees to pay for the imported Indian goods, which are worth roughly $4 billion annually.

However, they are reportedly using a much larger part of their rupee holdings to invest in risk-free government securities in India instead of “keeping that money idle”.

“The government is, of course, very keen for the Russians to really invest that money into the petroleum sector. There are a lot of other opportunities to invest,” he says.

A recent report in the Financial Times said Russia is spending piles of rupees to purchase electronics and machinery through a “closed payment system” to ensure a “steady inflow of electronic equipment” originally bought in Western markets.

Dr Sachdeva says the value of Russian exports to India is expected to be anywhere between $80 billion and $100 billion in the current year—an amount that the Russians can’t spend or invest back immediately in India.

“Some [of that] money could be invested in the capital market or actually [turned into] real investment. But [the Russians] are in need of real cash. So they would need cash flowing back to Russia,” he adds.

He says a significant chunk of money that India is paying for Russian goods is actually in “other currencies” like China’s yuan and the UAE’s dirham.

Russia is importing “a lot of stuff” from both China and the UAE, which means Moscow can settle those trades using the money it receives from Indian buyers of its crude oil.

‘Strategic ally’

Notwithstanding the technicalities of the US sanctions, India appears “unafraid” to take the risk of US sanctions by trading with suspect Russian banks.

Amit S Ray, professor of economics at Jawaharlal Nehru University, tells TRT World the US has “a lot to lose” if it chooses to punish New Delhi for trading with Russia.

“The target of US sanctions is Russia, not India. New Delhi is a well-established, strategic ally of the US,” he says, referring to the Quadrilateral Security Dialogue or the Quad, a strategic partnership among Australia, India, Japan, and the US in the Indo-Pacific region.

India is the only Quad member that shares its borders with China, a growing hegemonic power in direct competition with the US.

“The US has enormous economic interest in India. It doesn’t want to jeopardise it by imposing sanctions on India,” he says.

Moreover, India buys crude oil from Russia in bulk quantities only to process it for onward sales to European buyers. The arrangement works in favour of both Europe and the US, he adds.

Following the Ukraine war, Europe had to stop buying oil from Russia because of its strategic alliance with the US. But Europe needs oil, and India stepped in to save it from a big energy crisis by playing the middleman, he says.

“I would call it a win-win-win outcome, a masterstroke in economic diplomacy by India,” he adds.

Meanwhile, the US has officially said that it doesn’t want India to cut Russian oil imports.

India can purchase Russian oil at deeper discounts “outside of the price-cap mechanism” without using insurance and broking services from Western firms.

India has been importing Russian oil using non-Western maritime services to circumvent the price cap of $60 a barrel imposed earlier this year by the wealthy nations of the Group of Seven (G7), the European Union and Australia.

Dollar’s demise?

Ray downplayed the possibility of any currency replacing the dollar as the preferred medium of exchange for global trade, even though an increasing number of countries are trading among themselves in their own currencies.

“I think the talk of the dollar’s demise is premature. There’s still a very, very long way to go before anything can replace the dollar as the currency of trade,” he says.

Nearly 90 percent of foreign exchange transactions take place in the dollar mainly because of its relatively stable value as well as the economic and geopolitical significance of the US.

Dr Sachdeva of India’s Centre for European Studies is also of the same opinion.

“The dollar is still the main currency in the international market. The dollar is still very much dominant.”