Russia Oil Dilemma: In the intricate dance of global oil trade, Russia faces a significant challenge: the impact of non-dollar payments on one of its major routes, a consequence of Western sanctions over the Ukraine conflict. The recent clash with India, Russia’s primary buyer of seaborne oil, underscored the complexities of moving away from the dollar-centric model that has prevailed for decades.
For years, the U.S. dollar has dominated international oil trade, resilient to attempts to find alternatives. Russia’s shift away from transactions in dollars and euros, prompted by sanctions, has led to a reliance on less conventional currencies, creating a high-stakes game for both buyers and sellers. The recent standoff with India serves as a potent example of the challenges this shift presents.
India, now the leading buyer of Russian seaborne oil, threw a curveball in July by insisting on paying in rupees. The clash nearly derailed trading activity as Russian oil suppliers, guided by the central bank‘s reluctance to accept rupees, found themselves at an impasse. The Russian central bank’s dismissal of the non-convertible and limited-value rupee added to the complexity.
To salvage the strained deals with India, a temporary solution emerged. Cargoes were paid for in a combination of Chinese yuan, Hong Kong dollars transitioning to yuan, and the UAE dirham pegged to the U.S. dollar. However, this makeshift fix does not address the broader challenge of finding a sustainable alternative to the dollar, impacting not only India but also buyers in Africa, China, and Turkey.
The problems in Russia’s oil trade reverberate beyond the Indian standoff, affecting buyers globally. Countries like China, Africa, and Turkey, which have emerged as top buyers of Russian oil, grapple with the same currency complexities. With less than 10% of Russia’s daily oil output sold in dollars and euros, the search for alternatives intensifies.
Also Read: Greek Shipping Giants Navigate Choppy Waters, Exit Russian Oil Trade Amidst U.S. Sanctions
Since the imposition of Western sanctions, Moscow has navigated away from transactions in dominant currencies due to its restricted access to the international banking system. Sanctions prevent the Russian central bank from operating in dollars, and while exporters can theoretically use the currency, avoiding it adds a layer of opacity to their trade.
India’s push for rupee payments complicates matters for Russia. The punitive exchange rates imposed by India on converting rupees into other currencies, sometimes exceeding 10%, amplify the challenges. The situation could improve if Russia increased imports from India, allowing the rupees earned to be spent within the country.
Russian officials have advocated for payments in Chinese yuan, a more favorable currency for Russia. However, India’s sensitivity to using the currency of a regional rival complicates this proposition. Private refiners in India have resorted to yuan payments due to a lack of alternatives, highlighting the intricate diplomatic dance involved.
As Russia grapples with these currency complexities, the global oil trade landscape undergoes a subtle yet profound shift. The scrutiny on this trade is on the rise, evidenced by recent U.S. sanctions on tankers carrying Russian oil. The quest for alternatives to the dollar intensifies, raising questions about the future dynamics of international oil transactions in a post-sanctions era.
Our Reader’s Queries
Why is Russia cutting oil?
In an effort to offset the financial burden of its invasion of Ukraine, Russia has announced plans to reduce oil production and increase prices. The move is aimed at addressing the discount on Russian crude caused by sanctions, which has at times exceeded $40 per barrel. By taking these steps, Russia hopes to mitigate the costs of its actions and stabilize its economy.
Why is oil going up because of Russia?
The ongoing conflict between Russia and Ukraine, coupled with the energy sanctions imposed by the US, has led to a notable increase in crude oil prices.
Is Russia selling oil at a loss?
According to CREA analysis, the sanctions had a significant impact on Russian oil export revenues during the first half of the year. The losses peaked at EUR 180 mn per day in the first quarter of 2023.
Who is buying Russian oil 2023?
Russia’s earnings have seen a steady growth for two months in a row, with a notable increase of +3% in August, thanks to the surge in oil prices. The largest importer of Russian fossil fuels in August 2023 was China, followed by India, Turkey, the EU, and Brazil.