India and Russia have halted efforts to settle bilateral trade in rupees, after months of negotiations failed to convince Moscow to keep rupees in its coffers, two Indian government officials and a source with direct knowledge of the matter said.

This would be a major setback for Indian importers of cheap oil and coal from Russia who were awaiting a rupee payment mechanism to help lower currency conversion costs.

With a high trade gap in favour of Russia, Moscow believes it will end up with an annual rupee surplus of over $40 billion if such a mechanism is worked out and feels rupee accumulation is ‘not desirable’, an Indian government official, who did not want to be named, told Reuters.

The rupee is not fully convertible and India’s share of global exports of goods is just about 2%. These factors reduce the necessity for other countries to hold rupees.

India started exploring a rupee settlement mechanism with Russia soon after the invasion of Ukraine. Most trade is in dollars but an increasing amount is being done in currencies like the UAE dirham.