Meaningless trade in rupees: Russia cannot sell oil to India

For decades, the US dollar has been the currency of international oil trade, and attempts to find an alternative have been hindered by conversion difficulties and political obstacles.

The problems escalated when India, becoming the largest buyer of Russian seaborne oil after European clients' refusal, insisted on payment in rupees in July, leading to a virtual halt in trade, according to three sources familiar with the matter.

Sources wishing to remain anonymous reported that Russian oil suppliers cannot conclude deals in Indian rupees due to unofficial instructions from the Russian central bank stating that it will not accept this currency.

One source in a Russian bank, close to the Russian central bank, said that receiving income in a non-convertible currency has little value outside India, calling it senseless. According to another source, Russia has limited opportunities to spend rupees since its imports from India are minimal.

According to two sources, around mid-August, at least two major Russian oil companies threatened to redirect about a dozen tankers carrying up to a million tons of oil to India to other destinations.

As a temporary solution to the conflict related to Indian agreements, shipments were paid in a combination of Chinese yuan, Hong Kong dollars as a transitional currency to yuan, and UAE dirham, pegged to the US dollar.

However, they stated that finding a viable alternative to the dollar remains a problem, affecting buyers in Africa, China, and Turkey, which have become the largest buyers of Russian oil.

However, the most significant problem concerns India, which, according to LSEG data and Reuters calculations, buys over 60% of Russian seaborne oil. It is the largest buyer of Russian seaborne oil after China.

The problems are likely to intensify as trade control tightens. Washington imposed initial sanctions against tanker owners transporting Russian oil at prices higher than the Western limit of $60.

Dollar rejection

After the imposition of Western sanctions against Russia in February of last year, Moscow abandoned operations in dollars and euros, which dominate the world's currencies, and largely lost access to the international banking system.

According to five traders, less than 10% of Russian production, approximately 9 million barrels of oil per day, is sold in dollars and euros.

The Russian central bank cannot operate in dollars due to sanctions, and while Russian exporters theoretically can use the currency, abandoning it has the advantage of making it more difficult for the United States and other Western governments to control their trade.

However, alternatives lead to a high level of risk for both sides of the deal.

According to four trade and banking sources, in the first months of this year, India owed Russia about $40 billion for oil and other supplies.

Rupee issue

According to two Russian sources, India encourages spending rupees on its territory and has imposed punitive exchange rates when converting rupees into other currencies, sometimes exceeding 10% of the converted amount.

The situation could ease if Russia imported more goods from India that could be paid in rupees.

Instead, India imports more from Russia, while Russia is a major importer of automobiles, equipment, and other goods from China.

According to data published on the website of the Indian Ministry of Trade, from April to September, India's imports from Russia reached $30.4 billion, and India's trade deficit with Moscow increased to $28.4 billion compared to approximately $17 billion for the same period last year.

India's largest oil refinery, Indian Oil Corp, is making efforts to settle some payments, mainly for the purchase of Russian light low-sulfur oil Sokol from the Sakhalin-1 project. It could not pay for the Sokol supplies as the company supplying this grade had not yet opened an account in UAE dirhams to receive payment, a source reported.

Preference for yuan

Russian officials and oil company executives are pressuring Indian buyers to pay in Chinese yuan, which is more beneficial for Russia.

For India, using the currency of a regional competitor is very sensitive, although Indian private oil refineries have again switched to yuan due to a lack of other options after problems earlier this year, sources said.

Oil refineries in Indian states switched to UAE dirhams, but this was complicated by additional clearing requirements, as Washington's tougher stance forces other governments to act cautiously.

According to five oil traders and banking sources, since October, several UAE banks have tightened control over clients oriented towards Russia to ensure compliance with price limits.

Sources reported that at least two UAE banks have introduced compliance declarations for clients involved in the trade of Russian oil, oil products, and raw materials. They refused to name the banks.

US sanctions

On November 16, the United States imposed sanctions on maritime companies and vessels for transporting Russian oil sold above the Group of Seven price limit of $60 per barrel, as Washington seeks to close loopholes in the mechanism aimed at punishing Moscow for the war against Ukraine.

Three oil tankers, recently sanctioned by Washington, have been regularly delivering Russian Sokol oil to India in recent months.