Currency problems threaten Russian oil exports to India

Ever since Russian oil has been impacted by the consequences of its attack on Ukraine from February 2022, India has stepped in to become one of the major importers of Russian crude – second only to China.

However, one of Russia’s most profitable oil trade routes in 2022 and 2023 is facing a major challenge because of the drawbacks of payment in currency other than dollars.

India in July was understood to have seen itself as being in a position of strength in relation to Russia, and decided to insist on paying in Indian rupees. That went down like a lead balloon with Russian exporters, and trading activity nearly fell apart, said Reuters, citing three anonymous sources familiar with the matter.

The sources said that the unnamed Russian oil suppliers were unable to do deals in Indian rupees because of informal guidance from Russia’s Central Bank that it would not accept the currency.

The US dollar has been the currency of international oil trade for many decades, and, despite Russia’s difficulties with trading in the established global currency, the Indian attempt to make the oil deals a rupee-measured transaction would always have been seen as optimistic. Past efforts to find alternatives have come up against the problems of conversion, political obstacles, and the number of separate parties involved.

Russian banks were likely to have felt that there was little point in being paid for oil in a relatively non-fungible currency such as the Indian rupee. Russia’s imports from India are insignificant, and any attempts by Russian banks to pay for goods or services from other countries in rupees were likely to receive short shrift.

Come mid-August, at least two major Russian oil companies threatened to divert around a dozen tankers, carrying up to a million tonnes of oil to India, to other destinations, according to two of the sources. To solve the problem, at least temporarily, these cargoes were paid for in a combination of the Chinese yuan, the Hong-Kong dollar, and the UAE dirham, which is pegged to the US dollar. For various reasons these currencies posed fewer difficulties for the sellers than rupees.

The dollar shortage has affected not just India. Several importers of Russian goods and commodities have been finding it difficult to get hold of a sufficient supply of dollars to keep the trade going. India, however, is the biggest problem for both sides. With the US paying closer attention to these trades, the problems are only likely to increase.

Doing business in rupees is particularly difficult for Russia. India encourages rupees to be spent in India and has imposed tough artificial exchange rates when converting rupees into other currencies away from India, according to two Russian sources.

India’s imports from Russia reached $30.4bn in April-September, with its trade deficit with Moscow widening to $28.4bn. from about $17bn in the same period last year, according to the data posted on the Indian commerce ministry website.

India’s top refiner, Indian Oil Corp was reported to have been struggling to settle some payments, mainly for the purchase of Russia’s light, sweet Sokol grade from the Sakhalin 1 project. The IOC has said it has been unable to pay for the Sokol deliveries because the company supplying the grade has yet to open an account in UAE dirhams to receive payment.

Russian officials and oil executives have pressed Indian buyers to pay in Chinese yuan, which for Russia is a more useful currency. But China is a geopolitical rival of India. It does not like the suggestion that the currency of China is preferable to the currency of India. Indian private refiners have however been pragmatic, and have switched back to the yuan, due to the lack of other options.

Indian state refiners have turned to the UAE dirham, but that has been complicated by additional clearing requirements. Several UAE banks from October tightened their control over Russia-focused clients, with the aim of ensuring compliance with the price cap.

At least two UAE banks have introduced price cap compliance declarations for the clients involved in Russian crude, oil products and commodity trading, sources told Reuters.