The oil trade between Russia and Asia, particularly India, is experiencing serious difficulties due to a currency clash that shows no signs of a prompt resolution.
What Happened: As Reuters reported, trouble brewed in July when India, the largest seaborne oil purchaser from Russia, demanded to pay in rupees. Russian oil suppliers, adhering to unofficial instructions from the Russian central bank, were unable to accept the Indian currency, leading to a near standstill in trade activity.
The situation worsened in mid-August when leading Russian oil companies considered redirecting tankers transporting up to one million tonnes of oil intended for India to different destinations, two sources revealed. A temporary remedy saw cargoes paid for using a blend of the Chinese yuan, the Hong Kong dollar shifting to yuan, and the UAE dirham, which is tied to the U.S. dollar.
Nonetheless, the challenge of finding a dollar substitute persists. This dilemma affects buyers in Africa, China, and Turkey, who are the primary purchasers of Russian oil. The problem is particularly pronounced for India, which accounts for over 60% of Russian seaborne oil.
Why It Matters: Since Western sanctions were imposed on Russia last year, Moscow has moved away from dollar and euro transactions. The Russian central bank can’t function in dollars due to sanctions, and Russian exporters shun the currency to make it difficult for the U.S. and other Western governments to track trade.
The issue is further complicated for Russia as India promotes the use of rupees within its borders and has set stringent exchange rates for converting rupees into other currencies.
India’s foremost refiner, Indian Oil Corp (IOC.NS), is having trouble settling certain payments, primarily for the purchase of Russia’s light, sweet Sokol grade from the Sakhalin 1 project. Russian officials and oil executives have urged Indian buyers to pay in Chinese yuan, which is more beneficial for Russia but politically delicate for India.
This currency clash is also an aftermath fallout of the shifting oil market dynamics post the Russia-Ukraine war that began in late 2022. Since then, Russia’s oil exports to China have escalated, reaching a record high in May.
Image via Shutterstock
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