New Delhi: Supply of the relatively cheaper oil India has been sourcing from Russia could be at risk in the near future, unless some innovative thinking is employed to figure out how to make payments in currencies other than the US dollar, former diplomats and watchers of India-Russia relations have told ThePrint.
India reportedly imported a record high of 1.64 million barrels per day of Russian oil in March 2023, with Russia being India’s top supplier of crude oil for the sixth consecutive month and accounting for about a third of India’s oil imports.
The average price of the Indian basket of crude oil in April so far has been $83.96 a barrel. With India negotiating hard with Russia and securing its oil for much less than the $60 per barrel price cap imposed by the US and Europe on Russian oil, these large oil imports from Russia have also meant a huge saving for India.
The sanctions on Russia by the US have further meant that India cannot pay for Russian oil in US dollars, the conventional mode of payment used internationally. This has posed problems for Indian policymakers, with several options being put on the table, including using the Indian rupee to make payments, or even relying on the currency of a third country.
While there are reports and unofficial confirmations that India is paying for Russian oil using dirhams, the currency of the UAE, commentators feel that this would be a short-lived option. Reuters had reported in February that Indian refiners were paying for Russian oil using dirhams.
ThePrint has tried to obtain official confirmation of this, but to no avail. When contacted, the Ministry of Commerce recommended that all questions on the topic be sent to the Department of Financial Services under the Ministry of Finance and the Ministry of Petroleum and Natural Gas. Repeated calls and emails to both of these have elicited no response.
Those who are closely tracking India’s relations with Russia, however, did confirm that India is indeed using dirhams to pay Russia, but added that it was likely to be a short-lived arrangement because Russia has no need of so many dirhams.
“India is currently paying for Russian oil using dirhams, but that won’t last too long,” Nandan Unnikrishnan, a distinguished fellow at Observer Research Foundation with a specialisation in Russia, told ThePrint.
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The mechanics of using dirhams
“Russia is accumulating dirhams and wouldn’t know how to spend it, so at some point they will say stop,” Unnikrishnan added. “They run a trade surplus with the UAE, and because of the sanctions, the UAE might not want to openly supply Russia with the goods that Russia needs from them.”
Other international relations experts, while not being able to confirm whether India is paying using dirhams, said there shouldn’t be a problem if it is.
“I don’t know if India is buying Russian oil with dirhams,” PS Raghavan, Chairman of the National Security Advisory Board (NSAB) and a former diplomat who had been posted to the erstwhile USSR, said. “But, if the problem is that the dollar cannot be remitted directly to Russia in payment for the oil, you have to find another convertible currency to get around this.”
A freely convertible currency, such as the dirham, has no restrictions on its exchange rate. This is as opposed to currencies like the Indian rupee, the exchange rate of which is to an extent controlled by the Reserve Bank of India.
Raghavan said that since India needs to pay Russia for its oil in some manner, the use of dirhams would resolve the problem of not being able to use US dollars.
“The dirham is a convertible currency, so it can be bought with dollars or any other convertible currency,” he added.
However, it is precisely this arrangement that seems to raise questions in the minds of others. If the dirham is pegged to the US dollar, then paying Russia in dirhams is purely a cosmetic exercise, they point out.
“I am unable to understand what difference it makes whether India pays for imports from Russia in a UAE currency or in US dollars, because the UAE dirham has no independent existence from the dollar,” Talmiz Ahmad, a former Indian ambassador to the UAE, Oman, and Saudi Arabia, told ThePrint. “It does not have value of its own, like the Indian rupee does or the euro, British pound, or yuan do.”
“If we made the payment in any of those currencies, then it would be de-dollarising to an extent,” Ahmad added. “But doing it in a fully convertible currency that has no value of its own does not amount to de-dollarisation.”
How the Indian rupee fits in
India is exploring ways to use the rupee to pay for Russian imports, including oil, but Russia is not enthusiastic about this due to the large trade surplus it runs with India.
“Because of a lack of imports from India, it’s not enough to use the rupee,” Denis Valentinovich Manturov, Russia’s deputy Prime Minister and Minister for Industry & Trade told ANI earlier this month. “We need to boost trade from India. In this case we are looking at balance, like for example, we have with China – we have $200 billion trade with China and it’s balanced.”
In other words, what Manturov is saying is that since India exports so little to Russia, Russia will have no avenues to spend the rupees it would accumulate if India paid for its imports in that currency.
However, Unnikrishnan told ThePrint that India is paying for defence equipment using rupees because neither Russia nor India have any other choice.
“For defence equipment, we pay in rupees and Russia has to accept it,” Unnikrishnan explained. “The sanctions on military transactions pre-date the Ukraine-related ones, and they have their own level of severity. India and Russia have no option but to conduct these transactions in rupees.”
Indian exporters, however, remain hopeful of a rupee-ruble trading mechanism.
Last week, a 50-member delegation of the agro and food processing sector took part in buyers and sellers’ meetings in Moscow and St Petersburg.
In a statement issued during the meetings, NK Kagliwal, board member of the Federation of Indian Exports Organisations (FIEO) and who led the business delegation from India, said the rupee-ruble trade mechanism was “moving forward, but the pace is slow”.
Other options on table
The international media reported earlier this year that Russia and China had worked out an arrangement whereby Russian oil exporters were accepting payments in the Chinese yuan.
This has led to some speculation that Russia could ask India to pay for oil using yuan, which would be advantageous for Russia because it can then use those yuan to pay for its substantial imports from China.
Ahmad, however, believes that the chances of this happening are slim because of India’s current relations with China and Russia’s attempts to balance the two countries.
“I do not think Russia will insist on India paying for its oil using yuan,” Ahmad said. “This is not something acceptable to India, for various good reasons, and Russia will not push it. The Russians’ approach to the strategic scenario is China-India-Russia being part of a triumvirate in which Russia is the balancer between India and China. So, it will have separate relations with each of them.”
While no short-term solution seems to be in the offing, there is some work going on to find more medium-term alternative payment modes for Russian oil, apart from the US dollar.
“Some innovative solutions are being looked at,” Unnikrishnan revealed. “One possible solution being explored is for Russian companies to use the rupees from India to invest in manufacturing units within India, which can then export products to Russia.”
“Simultaneously, there is some discussion on getting Indian companies to invest in Russia, and use Indian labour,” he added. “They can then be paid in rupees. This would be a win-win situation for both countries. They need the labour and we need the manufacturing investment.”
As reported by ThePrint, India and Russia are also working on other payment mechanisms, including using the Russian financial messaging system as an alternative to the Belgium-based SWIFT system that the US has overwhelming control over. One of the sanction measures against Russia has been to ban Russian banks from the SWIFT network.
Other options being explored include obtaining recognition for Indian RuPay cards and Unified Payments Interface (UPI) in Russia, and the Russian MIR cards and its Fast Payments System (FPS) in India.
(Edited by Nida Fatima Siddiqui)
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