Why in news?
- As India continues to import oil from Russia, it is getting tougher for the country to pay for it.
- As Russia started offering lower discounts on its crude, there is a chance that the oil price exceeding the $60 a barrel limit.
- Western countries had decided to cap the price to a maximum of $60 per barrel of Russian oil transported through waterways.
- In such scenario, India cannot pay Russia in dollar as it will have to face repercussions from western countries for breaching the oil price cap.
- On the other hand, using currencies like the Chinese yuan for payments, which India has already started doing, has its own geopolitical ramifications amid strained ties with Beijing.
What’s in today’s article?
News Summary: Why are India-Russia trade payments in crisis?
Oil imports from Russia: Statistics
- Statistics
- Until a year ago, most of India’s oil imports came from West Asia, the U.S., and West Africa.
- Today, a bulk of crude unloading at India’s ports is likely to be coming from Russia.
- In February 2023, Russia surpassed Saudi Arabia to become the second biggest exporter of crude oil to India in FY23.
- India’s imports of crude oil from Russia increased nearly 13 times in 2022-23 to over $31 billion from less than $2.5 billion in 2021-22.
- Russia is now the largest supplier of oil to India, displacing traditional players such as Iraq, Saudi Arabia, and UAE.
- Reason
- Since the start of Ukraine war on February 24, 2022, Moscow has been hit by Western banking and economic sanctions.
- Against this backdrop, it found a ready market for its goods, especially crude oil, in India and offered steep discounts.
- India, meanwhile, unlike the West, chose to not join the list of countries formally imposing sanctions on Moscow.
Declining India’s Export to Russia
- Indian exports are grappling with payment-settlement uncertainty, leading to declining exports.
Why India is facing payment issues?
- Dollar and existing channel like SWIFT were not an option
- As part of war-induced sanctions on Moscow, the U.S., the EU, and the U.K. have blocked multiple Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
- SWIFT is a global secure interbank system whose primary function is to facilitate the secure exchange of financial messages between banks and other financial institutions.
- These messages typically involve instructions for transferring funds, such as payment orders, securities trading information, and other types of financial transactions.
- The West had targeted one of its biggest traded goods — energy — for which transactions have traditionally been dollar-dependent.
- Western countries did so by imposing a price cap of $60 per barrel.
- While India is not a formal signatory, it has tacitly agreed to maintain the price cap as much as possible.
- Also, banks and traders did not want to get involved in transactions that breach the oil cap over fears of repercussions for their funds.
- Until recently, the blends of oil India was importing from Russia were largely below the price cap fixed by G-7 countries and India was able to pay for the oil using dollars.
- However, Russia has lowered its discounts due to high demand from China and lower grade oil is now in short supply.
- Challenges to rupee-rouble mechanism
- This mechanism was considered as an alternative payment mechanism to settle dues in rupees instead of dollars or euros.
- However, as per the reports, this mechanism could not take off due to factors. This includes:
- scepticism on the rupee-rouble convertibility as the rouble’s value is kept up by capital controls and not determined by the market.
- Russia finds the rupee to be volatile.
- The unforeseen surge in oil trade between India and Russia in one year alone has led to a massively ballooning trade deficit.
- India’s trade deficit with Russia touched $43 billion in 2022-23.
- India imported goods worth $49.35 billion while its exports were at $3.14 billion.
- This has led to staggering amounts of Indian rupees in Russian banks that cannot be used by Russia in its war efforts.
What next?
- While India could use the yuan for payments, there are concerns about how that would appear geopolitically as it continues to have strained ties with Beijing since the border standoff.
- In such case, another solution could be to counter the deficit with Russia by getting it to make investments in energy projects in India or to invest in government bonds.
