Russia’s crucial oil trade routes have encountered a significant challenge due to the complications arising from payments in currencies other than the US dollar, and a quick resolution seems elusive.
For decades, the global oil trade has predominantly used the US dollar as the currency of choice, with attempts to find alternatives hampered by conversion difficulties and political hurdles.
The issue came to the forefront when India, now Russia’s largest buyer of seaborne oil since European customers scaled back their purchases, insisted on paying in Indian rupees in July.
According to anonymous sources familiar with the situation, Russian oil suppliers were unable to accept rupees, citing informal guidance from the Russian central bank, which refused to accept the currency.
This impasse left both parties at a standstill, as the rupee holds little value beyond India, limiting Russia’s ability to utilize the currency for imports.
As a temporary solution, a combination of the Chinese yuan, the Hong Kong dollar, and the UAE dirham (pegged to the US dollar) was used to pay for cargoes involved in Indian deals.
Nevertheless, the larger issue persists – finding a viable alternative to the US dollar affects buyers in Africa, China, and Turkey, all of which have become top purchasers of Russian oil.
India, in particular, presents a major challenge, as it accounts for more than 60% of Russia’s seaborne oil trade.
The situation is expected to worsen as scrutiny on the trade intensifies. Recent US sanctions on owners of tankers carrying Russian oil priced above Western caps have made the use of the dollar even more precarious.
Since Western sanctions were imposed on Russia in February of the previous year, Moscow has been moving away from transactions in dollars and euros, the world’s dominant currencies, and has faced significant hurdles in accessing the international banking system.
Less than 10% of Russia’s daily oil output of approximately 9 million barrels is now sold in dollars and euros.
While using alternative currencies may circumvent some of the challenges, it introduces higher levels of risk for both parties.
India, in particular, imposes punitive exchange rates on converting rupees into other currencies, making it less attractive for Russia.
To alleviate the situation, Russia has urged Indian buyers to use the Chinese yuan, which would be more beneficial for Russia.
However, this proposition is sensitive for India due to its rivalry with China.
In conclusion, Russia’s oil trade faces substantial challenges in finding alternatives to the US dollar for payments, with the situation exacerbated by recent sanctions.
India’s insistence on using the rupee, coupled with the difficulty of finding a viable alternative currency, poses a significant hurdle for both Russia and its international buyers.