Central Idea

India’s increasing reliance on oil imports from Russia has presented challenges in making payments due to various factors.
The breach of the oil price cap imposed by the US and European nations, lower discounts offered by Russia, and geopolitical ramifications of using alternative currencies have complicated the payment process.

Oil Imports from Russia

Shift in Imports: Russia has become the largest supplier of oil to India, surpassing traditional players such as Iraq, Saudi Arabia, and the UAE.
Increased Imports: Crude oil imports from Russia to India have surged, reaching over $31 billion in 2022-23, almost 13 times higher than the previous year.
Dominance in Supply: Russia accounts for a significant portion of seaborne supplies of Russian-grade oil priced under $60 per barrel.

SWIFT Sanctions: Western sanctions on Russian banks have blocked transactions through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, hindering payments.
Dollar Dependency: Oil transactions have traditionally been dollar-dependent, but the price cap and sanctions have prompted India to explore alternative payment mechanisms.
Yuan and Dirham Payments: Some non-dollar payments for Russian oil have been settled in Chinese Yuan and UAE dirham.

Failed Implementation: Negotiations to reactivate the rupee-rouble trade arrangement have faced obstacles due to scepticism about rouble convertibility and concerns over rupee volatility.
Trade Deficit Concerns: The surge in oil trade has led to a significant trade deficit, reaching $43 billion in 2022-23, creating challenges for India.

Strained Ties with China: Using the Chinese yuan for payments raises geopolitical concerns amid ongoing tensions between India and China.
De-dollarization Efforts: The U.S. sanctions have prompted countries to explore de-dollarization, seeking alternatives to the global reserve currency.

Investment Opportunities: Balancing the trade deficit with Russia could involve encouraging investments in energy projects in India or Russian investments in Indian government bonds.
Roadmap for Rupee Internationalization: India aims to increase the international acceptance of the Indian rupee, although challenges related to its purchasing power and global market share remain.

India’s challenges in paying for oil imports from Russia have arisen due to breaches of the oil price cap, limited payment mechanisms, and geopolitical considerations.
The failed rupee-rouble mechanism and the ballooning trade deficit have further complicated the situation.