Some of the Russian money is invested in Indian securities, but most of it remains in Vostro accounts due to a lack of investment opportunities in India for Russians and continued volatility in exchange rates.

“It is difficult to say the exact amount in the Vostro accounts since some transactions are very complex. However, the figure is likely closer to $7-8 billion than $30-40 billion,” said the first person cited above, who didn’t want to be named.

A Vostro account is a bank account held by a domestic bank on behalf of a foreign bank.

The foreign bank can use its Vostro account to conduct transactions, including forex settlements, cross-border payments and investments in the domestic market.

So far, Russian funds (in rupee) have been invested in Indian government treasury bills, since such funds are not allowed to be invested in corporate debt according to regulations.

Mint reported on 9 August that Russian funds worth about $10-12 billion are estimated to have been invested in Indian government treasury bills in the year ended 31 March 2023, after a surge in trade deficit led to higher surpluses in the Vostro accounts.

Meanwhile, Russia is looking to invest in different kinds of Indian government securities, as repatriating money is currently not an option, said the second person.

“Russia would ideally like to invest in new technologies. But, much of the intellectual property rights of these technologies are with the West (especially the US). So, it is investing in government securities,” the person added.

The Reserve Bank of India (RBI) allows investment of excess balance from Vostro accounts in payments for projects and investments, treasury bills and government securities.

However, experts said the Russian investments are likely in short-term government securities, as their exporters would like to take back the money lying in India at the earliest.

“The yield difference between long-term bonds and short-term ones like treasury bills are barely 30-50 basis points,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

So, it makes no sense for Russians to invest in long-term government securities, as they would want to take back the money sooner than later, added Srinivasan.

Since the start of the Ukraine-Russia war, Moscow has swiftly risen to become India’s fourth-largest exporter, primarily driven by its oil exports.

India’s imports from Russia grew nearly fivefold in the last financial year to $46.2 billion. However, payment issues remain a bottleneck between the two countries.

Spokespeople for the finance ministry, the commerce ministry, the RBI and the Russian embassy didn’t respond to queries.

During FY23, India had a $43 billion trade deficit with Russia, which left their exporters with large surpluses in their Vostro accounts in India.

Indian refiners are using a mix of currencies, including yuan, to settle most of their Russian oil purchases. However, both countries were discussing trade in local currency, which is yet to take off because of currency volatility and the high trade deficit.

“At the moment, Russia cannot take back the money because the exchange rate is a challenge for them. Dollar payment to Russia is possible via the Society for Worldwide Interbank Financial Telecommunication (SWIFT) mechanism, which is blocked (for Russia),” Federation of Indian Export Organisations director-general Ajay Sahai said.

“Besides, the entire Russian manufacturing has come under sanction. So, even if an Indian company has the machinery required by Russia, they won’t be able to supply due to sanctions,” he added.

The RBI has approved 34 applications of different Russian banks for opening rupee accounts with Indian banks to facilitate two-way trade in the backdrop of Western sanctions.

The rupee accounts have been opened by Russian banks in 14 Indian commercial banks, including UCO Bank, State Bank of India, HDFC Bank, Yes Bank, IDBI Bank, Punjab National Bank, Axis Bank and Canara Bank.

Shashank Mattoo contributed to this story.

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Updated: 19 Oct 2023, 12:07 AM IST