Switch Deals Hit Re Auctions In Moscow

There has been only two major auctions this fiscal. The second, for Rs 100 crore, was held last week. Another is scheduled for the middle of this month.

The rupee auction is usually conducted every fortnight by Russia's central bank Vnesheconom Bank under the debt repayment scheme.

Under this scheme, the Indian government is committed to pay back its debt in terms of selected commodities, goods and services to Russia, which took over a substantial portion of the debts of the former Soviet Union.

Under the protocol signed in 1988-89, India has to export goods worth Rs 3,000 crore to Russia under the rupee repayment account every year for the next 20 years at a conversion rate of $1= Rs 19.

 

Switch deals involve switching commodities meant exclusively for Russia under the rupee-rouble trade agreement to hard-currency areas. Payments are made in US dollars and St Petersburg and Helsinki are the two centres where such deals are made.

Sources said the maximum switch deals occur in commodities like coffee and cashewnuts.

To disguise the deal, an official payment is credited to the Indian firms in rupees from a Russian importing firm, which is usually an associate of the Indian exporting firm. These associate firms are then compensated separately.

Sources say Indian firms can earn a mark-up of 25 per cent over the rupees officially paid for the deal by diverting cargo in this manner.

Exporters are able to do this because the letters of credit to Russia only indicate the value of the consignment, not the volume (for example, a shipment of Rs 100 crore may be made but the number of kilograms is not indicated).

This leads to rampant overinvoicing, sources said.

Some exporters say the problem could be partially sorted out if the Reserve Bank of India were to apply stringent regulatory mechanisms to monitor landing certificates (which certify that goods have reached their actual destination). Delays here have given some exporters the opportunity to indulge in switch deals.

The Indian government is likely to introduce consignment exports for certain commodity repayments accounts to end the switch trade problem. Consignment exports for certain commodities like coffee, tea and cashewnuts may be introduced soon.

In a consignment export, the Indian government directly exports commodities to warehouses in Russia. The goods are sold after letters of credit are opened in Russia. These consignment exports are generally sent to the Russian buyer who stores the goods in warehouses and sells them according to market demand. There are no associate firms involved.

The need for consignment exports has become important with the recent slump in exports of exports, primarily tea.