Reuters: India’s oil deals with Russia undermine decades of dollar dominance

US sanctions against Russia have begun to undermine the dollar’s long-standing dominance in international oil trade, as most transactions with India – Russia’s main oil market by sea – are in other currencies. The agency reports Reuters.

The oil trade in India after the start of the military operation in Ukraine is a good example of a currency transition that could prove sustainable. India is the world’s third largest oil importer, and Russia became its leading supplier after Europe withdrew supplies from Moscow as part of sanctions.

Since the oil price ceiling for Russia went into effect on Dec. 5, 2022, Indian consumers have paid for most Russian oil in non-dollar currencies, including the UAE dirham, and more recently in Russian rubles, bank sources told the agency. The sources added that India’s purchases of Russian oil over the past three months are equivalent to several hundred million dollars.

Some Dubai-based traders, as well as Russian energy companies Gazprom and Rosneft, are seeking non-dollar payments for certain niche grades of Russian oil that have been selling for more than $60 a barrel in recent weeks, three people familiar with the matter told the agency. Three Indian banks have approved some of the deals, sources and former Russian and US economic officials told Reuters.

However, dirham payments for Russian oil could complicate US and UK sanctions against MTS Bank, based in Moscow and Abu Dhabi. According to sources, MTS-Bank carried out part of the non-dollar payments for Indian oil.

A source at an Indian refinery said Indian customers and Russian suppliers are determined to continue trading Russian oil in other ways despite the sanctions.

“Russian suppliers will find some other banks to accept payments,” the source told Reuters. “The government is not currently asking us to stop buying Russian oil, so we hope that an alternative payment mechanism will be found in case the existing scheme is blocked.”

Paying for oil in dollars has been a nearly universal practice for decades. For comparison: according to the SWIFT payment system for January, the share of this currency in the total volume of international payments is 40%.

Daniel Ahn, former chief economist at the US State Department and fellow at the Woodrow Wilson International Center for Scholars (described as undesirable in Russia), says the dollar’s strength is unmatched, but sanctions could undermine the West’s financial systems.

Gita Gopinath, deputy managing director of the International Monetary Fund, said a month after the outbreak of hostilities in Ukraine that sanctions against Russia could undermine the dominance of the dollar by encouraging the creation of smaller trading blocs using other currencies. “The dollar will remain the main global currency even in this situation, but fragmentation at a smaller level is certainly quite possible,” she told the Financial Times.

In 2022, India has overtaken Europe as the top buyer of seaborne oil from Russia, according to the International Energy Agency. India has increased imports of Russian oil by 16 times compared to the period before February 24. Russian oil accounts for about a third of India’s total oil imports.

Anastasia Larina