Russia’s Oil Deals With India Are a Warning

• Heavily sanctioned Russia is facing challenges from its dedollarization drive.
• It now trades less than 10% of its oil using the greenback and the euro.
• But trading in alternative currencies like the Indian rupee and the Chinese yuan has its own issues.

Heavily sanctioned Russia is one of the loudest critics of the US dollar-denominated global financial order that’s actively trading in alternative currencies.

But even Russia, which has been actively skirting sanctions and using local currencies for trade to prop up its economy, hasn’t found a truly viable alternative currency for trade — highlighting the problems and risks of countries looking to abandon the greenback.

Russia’s oil trade, which accounts for about a quarter of the country’s budget, exemplifies its problems with alternative-currency trade.

Before Moscow’s invasion of Ukraine, most Russian oil went to Europe. Now, India and China have become the biggest buyers following sanctions imposed after Vladimir Putin invaded Ukraine.

The international oil trade is typically denominated in the dollar, but due to sanctions, less than 10% of Russia’s daily oil trade is sold in the dollar and the euro, five traders told Reuters on Monday.

Risks and complications of alternative currencies

Russia’s oil trade with India is particularly problematic.

To be able to buy Russian oil, India insisted on settling trades in the rupee earlier this year. That’s because using US dollars could expose it to secondary sanctions, and it worries about acquiring rubles at a fair rate on the open market.

However, Indian authorities have controls on the rupee, and the currency is not fully convertible — which means it can’t easily be changed into another currency.

This poses a problem for Russia, which was stuck with billions of rupees in Indian banks earlier this year.

India encourages the rupees to be spent in India itself. The problem for Russia is that there’s not much it wants to buy from India.

The currency issue is not just a problem with India — sources tell Reuters that it’s affecting other top buyers in Africa, China, and Turkey, too.

To get around its rupee conundrum and reduce its currency risks, Russian officials and oil executives have been pushing Indian buyers to pay them in Chinese yuan. The yuan is also subject to controls and is not fully convertible, but Russia imports a lot more from China, including cars, machinery, and other goods.

Yet the Indian government is increasingly uncomfortable with yuan trade since there are currency-conversion charges involved and a geopolitical rivalry between Delhi and Beijing.

Another currency Russia could use to trade with India is the United Arab Emirates dirham — but the UAE is increasing its oversight of Russian companies.

Despite all the risks and complications that come with trading in alternatives to the US dollar, the Kremlin is not backing off its stance to move away from dollar trades.

“Despite all the problems with the rupee, we nevertheless prefer trading in rupees and rubles and not in dollars. This already speaks to the fact that we have excluded the option of dollarization in our bilateral trade,” Sergey Ivanov, a senior Russian official, said at a forum on Monday, per the state news agency TASS.

Correction: November 28, 2023 — An earlier version of this story misstated the type of currency Russia has in Indian banks. It has rupees, not rubles.