Problems with trade without dollars: Russia’s oil revenues are piling up in India

Trouble trading without dollars
In India, Russia’s oil revenues are backing up

After being sanctioned by the West, Russia found a new major buyer for its oil in India. But he pays in rupees. Billions of dollars are now piling up at Indian banks.

At first glance, it is a win-win situation for Russia and India. Russia, hit by extensive financial and trade sanctions from the West, can sell much of its oil, which Europe has spurned, to India and thus keep its most important export industry by far going. India’s economy, in turn, is supplied with crude oil at a preferential price. Within the past year, India has become one of the top customers for Russian oil. Russia supplies more than 1.5 barrels per day, only China is currently buying a comparable amount.

Since its invasion of Ukraine, Russia has Income from exports to India increased from a good 10 billion to the equivalent of more than 50 billion dollars. But the problem is that the oil is not paid for in US dollars, but in Indian rupees. And the Russian exporters sometimes can’t get them out of India. On their accounts in Indian banks, like this reports Bloomberg, billions of dollars worth of rupee assets have since accumulated. Up to three billion dollars – in rupees – would be added every quarter.

The fact that the Russian-Indian oil trade is settled in rupees was initially seen as a success by representatives of the two countries. This is how you make yourself independent of the dominance of the US dollar and the US government, which also has a great influence on the global financial system through its currency. However, there is a simple reason why the dollar has been the main global trading medium not only on the oil market for many decades: it is accepted all over the world and is easy – at least for all countries that are not currently subject to strict sanctions like Russia transferrable between trading venues and can be exchanged anywhere.

The rupee cannot do any of that. On the one hand, the currency is subject to legal restrictions in its home country in terms of exchange and export. On the other hand, the global demand for rupees is very low because India has a high trade deficit. The country exports far less than it imports. Therefore, companies, banks and other institutions outside of India hardly need rupees. Due to India’s comparatively small export economy, Russian companies have no use for the surplus rupees either. The value of India’s exports to Russia was recently less than a tenth of India’s imports from Russia.

Rupee mountain likely to keep growing

For several months, Russian and Indian officials have been trying to find a solution to the rupee problem. One suggestion: Russian companies could simply leave their rupee assets in India and invest them, for example in company shares or in infrastructure projects. Apparently, the companies concerned are not very enthusiastic about this, especially if they need their income in Russia at short notice.

Another solution is to transfer and exchange the rupee balances via third countries and currencies to Russia. However, this is difficult not only due to the already mentioned lack of interest in Indian rupees abroad. Issuers of major global currencies such as the euro and Japanese yen have also imposed sanctions on Russia. According to reports, limited rupees can be exchanged through the United Arab Emirates and transferred to Russia. Another way is via China. However, due to the rivalry between India and China, this possibility does not have much official support in New Delhi.

After the loss of Western customers, it will be difficult for Russia to find a replacement for India as a major buyer of its oil. Only a dozen countries are consuming more than 1.5 million barrels a day, and they’ve either joined anti-Russian sanctions or are producing their own oil. So the rupee mountain in Russian accounts in India is likely to keep growing for a while.

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