Explained | Why are India-Russia trade payments in crisis? Premium

What is the current size of India’s imports from Russia? Why is there an issue of what currency to use for payments? Why did the rupee-rouble mechanism not work? What other currencies is India exploring for payments?

The story so far: As India continues to import oil from Russia, it is getting tougher for the country to pay for it. On the one hand, it faces repercussions of breaching the oil price cap of $60 a barrel put in place by the U.S. and European nations as Russia offers lower discounts on its crude. 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.

Until a year ago, most of India’s oil imports came from West Asia, the U.S., and West Africa but 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. Since the start of Russian President Vladimir Putin’s “special military operation” in Ukraine 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.

As a result, 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. In the four-month period between November 2022 and February 2023, Russia took over the top spot from Iraq. An analysis by Reuters showed how India accounted for more than 70% of the seaborne supplies of Russian-grade oil under $60 dollars a barrel in May.

For starters, 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), a global secure interbank system. An estimated $500 million is pending for goods already shipped by Indian exporters to Russia and it is now not possible to get the payments through the SWIFT channel.

Thus, in an effort to economically strain Russia, the West targeted one of its biggest traded goods — energy — for which transactions have traditionally been dollar-dependent. Besides an oil ban jointly agreed between multiple countries last year, it was also decided to cap the price to a maximum of $60 per barrel of Russian oil transported through waterways. While India is not a formal signatory, it has tacitly agreed to maintain the price cap as much as possible. Besides, banks and traders may 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.

Notably, India was in negotiations with Russia to reactivate the rupee-rouble trade arrangement, which is an alternative payment mechanism to settle dues in rupees instead of dollars or euros.