The Economic Times reported on Tuesday that India and Russia are exploring the establishment of a benchmark rupee-ruble exchange rate to facilitate direct trade between the two countries, circumventing the use of the US dollar due to Western sanctions on Moscow.

This initiative is driven by the need to overcome barriers in dollar-based trade, especially as many Russian banks have been excluded from the SWIFT system.

According to ET, the matter is currently being discussed during a visit to Moscow by a deputy governor of the Reserve Bank of India and senior officials from Indian state-owned banks.

India’s trade with Russia has surged significantly, particularly in crude oil imports, with Russian goods to India increasing by 8,300% since 2021.

Read more: India: Trade with Russia not temporary

Currently, trade transactions between the two countries rely on dollar exchange rates, but the establishment of a rupee-ruble exchange rate could provide an alternative, especially for payments involving oil and heavy imports.

Moreover, the RBI and Bank of Russia may set and adjust the rupee-ruble reference exchange rate according to market conditions.

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Discussions also include ways to utilize the accumulated rupee balances in special accounts held by Russian banks in India, which have grown due to the imbalance between Indian imports from and exports to Russia.

This comes as part of broader trends where Russia and its Asian trade partners, like China, have increasingly used national currencies for transactions in response to sanctions, the report notes.

Read more: US calls on India to rethink ties with Russia, China

Russia and India have had strong bilateral relations since the Cold War, and New Delhi has acted as Moscow's key trading partner since the start of the Russia-Ukraine war.

However, the relationship between the two countries has seen tension due to Russia's close developments with India's primary competitor, China.

New Delhi has become a prominent purchaser of Russian oil amid Western sanctions on Moscow. Trade between India and Russia surged to $65.7 billion in the fiscal year ending March 2024, a notable 33% rise from the preceding year.

India and Russia are reportedly working on securing year-round access to the Northern Sea Route, which spans Russia's northern coast and serves as the shortest shipping route between East Asia and Europe. Their goal is to enhance the transportation of goods to emerging markets by utilizing trade routes effectively.

Last month, Russian President Vladimir Putin and Indian Prime Minister Narendra Modi held held a meeting in Moscow, during which they discussed expanding their trade and financial partnerships.