India-Russia oil deals challenge decades-old dollar dominance

The pre-eminence of the dollar has been periodically challenged, but it has held due to the tremendous advantages of using the most widely accepted currency in the business world.

India’s oil trade, in response to the sanctions and war turmoil in Ukraine, provides the clearest evidence yet of a shift to other currencies that could prove lasting.

The country is the world’s third-largest oil importer and Russia became its main supplier after Europe shunned supplies from Moscow following its invasion of Ukraine that began in February last year.

Since an anti-war coalition imposed an oil price cap on Russia on December 5, Indian customers have paid for most Russian oil in currencies other than the dollar, including the United Arab Emirates dirham and , most recently the Russian rouble, several banking and oil trading sources said.

Transactions over the past three months total the equivalent of several hundred million dollars, the sources added, which had never previously been reported.

The Group of Seven economies, the European Union and Australia agreed on price caps late last year to prevent Western services and vessels from marketing Russian oil, to unless it is sold at a low imposed price in order to deprive Moscow of the funds necessary for its war.

According to three directly informed sources, some Dubai-based traders and Russian energy companies Gazprom and Rosneft are seeking foreign currency payments for certain grades of Russian oil sold in recent weeks at a price above the $60 a barrel cap.

These sources asked not to be named due to the sensitivity of the issue.

These sales represent only a small portion of Russia’s total sales to India and do not appear to violate sanctions, which US officials and analysts have predicted could be circumvented by non-Western services, such as Russian shipping and insurance.

Three Indian banks backed some of the deals, as Moscow sought to dedollarize its economy and traders to avoid sanctions, the trade sources, along with former Russian and U.S. economic officials, told Reuters.

But pursuing dirham payments for Russian oil could become more difficult after the United States and Britain last month added Russian bank MTS, based in Moscow and Abu Dhabi, to the Russian financial institutions listed on the list of sanctions.

According to trade sources, MTS facilitated some Dirham payments for Indian oil. Neither MTS nor the US Treasury immediately responded to a Reuters request for comment.

An Indian refining Source said most Russian banks have been under sanctions since the war, but Indian customers and Russian suppliers are determined to continue trading Russian oil.

“Russian suppliers will find other banks to receive their payments,” the Source told Reuters.

“As it stands, the government is not asking us to stop buying Russian oil, so we hope that another payment mechanism will be found in case the current system is blocked.

FRIENDLY OR UNFRIENDLY

Paying for oil in dollars has been an almost universal practice for decades. In comparison, the share of this currency in all international payments is much lower (40%), according to January figures from the SWIFT payment system.

Daniel Ahn, former chief economist for the US State Department and now a fellow at the Woodrow Wilson International Center for Scholars, believes the dollar’s strength is unmatched, but sanctions could undermine Western financial systems while failing to achieve their goal.

“Russia’s short-term efforts to try to sell products in exchange for currencies other than the dollar are not the real threat from Western sanctions,” he said.

“The West weakens the competitiveness of its own financial services by adding an extra administrative layer.

The price cap coincided with an EU embargo on Russian oil imports by sea, capping a year of bans and sanctions, including the expulsion of Russia from the global payment system SWIFT.

Nearly half of its gold and currency reserves, which stood at nearly $640 billion, have been frozen.

In response, Russia said it would seek payment for its energy in the currency of “friendly” countries and last year ordered “non-friendly” EU states to pay for gas in rubles.

For Russian businesses, with payments blocked or delayed even if they didn’t violate any sanctions, due to overzealous compliance with the rules, dollars have potentially become a “toxic asset”, says independent analyst and former Alexandra Prokopenko. advisor to the Bank of Russia.

“Russia desperately needs to trade with the rest of the world because it is still dependent on its oil and gas revenues, so it is trying all possible options,” she told Reuters.

“They are working on setting up a direct infrastructure between the Russian and Indian banking systems.

India’s largest creditor, State Bank of India, has a nostro, or foreign currency account, in Russia. Similarly, many Russian banks have opened accounts with Indian banks to facilitate trade.

Gita Gopinath, deputy managing director of the IMF, said the month after Russia invaded Ukraine that sanctions against Russia could erode the dominance of the dollar by encouraging smaller trading blocs to use other currencies.

“The dollar would remain the primary global currency even in this landscape, but fragmentation on a smaller level is certainly entirely possible,” she told the Financial Times. The IMF did not respond to a request for comment from Reuters.

Beyond Russia, tensions between China and the West are also eroding long-established norms of dollar-dominated global trade.

Russia holds much of its foreign exchange reserves in renminbi, while China has reduced its dollar reserves, and Russian President Vladimir Putin said in September that Moscow had agreed to sell gas to China in yuan and rubles rather than dollars.

INDIA SUPPLANTS EUROPE

India overtook Europe as Russia’s biggest customer for oil transported by sea last year, grabbing cheap barrels and boosting Russian crude imports 16 times over the world. before the war, according to the International Energy Agency, based in Paris. Russian crude accounted for about a third of its total imports.

Although India does not recognize the sanctions imposed on Moscow, the majority of Russian oil purchases, regardless of currency, have been made in compliance with these sanctions, according to trade sources, and almost all sales occurred at levels below the price ceiling.

Despite this, most banks and financial institutions are reluctant to make payments to avoid unwittingly violating international law.

For Indian refiners who in recent weeks have started settling some Russian oil purchases in roubles, trade sources say payments were partly handled by the State Bank of India through its ruble nostro account in Russia.

These deals mainly relate to oil purchases from Russian energy giants Gazprom and Rosneft, the sources added. Bank of Baroda and Axis Bank handled most payments in dirhams, the sources added.

The banks, Gazprom and Rosneft did not respond to a Reuters request for comment.

India has prepared a framework to settle trade with Russia in Indian rupees if ruble transactions are halted by new sanctions, the sources said.

When asked about this, the US Treasury referred to the assertion of Janet Yellen, US Treasury Secretary, two weeks after the start of the war: “I don’t think the dollar has any serious competition, and there is little likely to have one before long.”