One of the pivotal oil trade routes for Russia, especially since the imposition of Western sanctions over the Ukraine conflict, is encountering significant challenges due to complications arising from payments in currencies other than the dollar. The absence of a near-term solution exacerbates concerns surrounding one of Russia’s most lucrative oil trade routes.
The international oil trade has long been dominated by the U.S. dollar, with attempts to explore alternatives hampered by conversion difficulties and political obstacles. Recent complications arose when India, now Russia’s primary buyer of seaborne oil, insisted on paying in rupees in July, causing a near breakdown in trading activities, as revealed by three anonymous sources familiar with the matter.
The issue stems from informal guidance from the Russian central bank, signaling its unwillingness to accept transactions in Indian rupees. According to a Russian banking source close to the central bank, dealing with a non-convertible currency of little value outside India is deemed “pointless,” given Russia’s limited opportunities to spend rupees.
In response to the clash involving Indian deals, a temporary resolution involved payments in a combination of Chinese yuan, Hong Kong dollars as a transition currency into yuan, and the UAE dirham, pegged to the U.S. dollar. However, the challenge persists in finding a viable alternative to the dollar, affecting buyers in Africa, China, and Turkey, who have emerged as top purchasers of Russian oil.
The primary concern revolves around India, responsible for over 60% of Russian seaborne oil purchases. As scrutiny on the trade intensifies, Washington recently imposed sanctions on tankers carrying Russian oil priced above a Western cap, marking the first enforcement since its introduction late last year.
Since the Western sanctions imposed on Russia in February of the previous year, Moscow has shifted away from dollar and euro transactions due to limitations in the international banking system. Less than 10% of Russia’s daily oil output of approximately 9 million barrels is sold in dollars and euros, according to five traders involved.
Business transactions in rupees pose a particular challenge for Russia, given India’s discouragement of spending rupees outside its territory and punitive exchange rates for converting rupees into other currencies. Despite owing Russia about $40 billion for oil and other supplies earlier in the year, India’s trade deficit with Moscow widened to $28.4 billion, with complications arising from payment settlements, especially for the purchase of Russia’s Sokol grade.
Russian officials and oil executives have urged Indian buyers to consider paying in Chinese yuan, a more convenient currency for Russia. However, the sensitivity surrounding the use of a regional rival’s currency has led Indian state refiners to explore alternatives, including the UAE dirham, although this has been complicated by additional clearing requirements amid Washington’s tougher stance. UAE banks have tightened control over Russia-focused clients to ensure compliance with the price cap, with at least two banks introducing price cap compliance declarations for clients involved in Russian crude, oil products, and commodity trading.
Featured Image: Freepik @ aleksandarlittlewolf
Author Faith Yakubu 
