India’s payment woes with sanction-hit Russia are set to deepen as the country may no longer be able to pay for Russian oil in dollars since lower discounts offered by Moscow on its crude and lesser supply of the cheaper variety is pushing prices above the $60 per barrel price cap determined by G7 nations, sources have said.

“If India continues to pay for its Russian oil imports at above $60 per barrel, it may attract Western sanctions and, therefore, banks and traders may not want to get involved in it. The most viable alternative is rupee payment but with Moscow already grappling with piling rupee balance due to India’s import of defence equipment, the situation at hand is difficult,” a source tracking the matter told businessline.

Also read: What’s wrong with importing Russian oil?

Hit by Western banking and economic sanctions after it attacked Ukraine in January last year, Russia found a ready market for its crude in India and offered steep discounts. 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 Saudi Arabia, UAE and Kuwait.

As this oil was largely below the price cap fixed by G-7 countries, above which Western sanctions are to kick in, India was mostly able to pay for the oil using dollars. 

“But the oil below the $60 per barrel price cap is mostly over now. One reason is that Russia has reduced its discount on oil because of increased demand from China and the second is that the lower grade of Ural, which was available at a cheaper price, is now in short supply and India is being forced to move to higher grades,” the source explained.

Also read: India is starting to reach the limits of its Russian oil splurge

Officials from the Ministry of External Affairs, the Finance Ministry, and the Ministry of Petroleum & Natural Gas are in consultations to see how the situation can be best handled, the source said.

Russia’s surplus rupee balance

Buying oil at prices higher than the price cap would make it a sanctioned transaction and it will no longer be possible to use the dollar or euro as no bank would want to get involved. “As India does not allow the use of Chinese yuan and trading in UAE’s dirham, too, has become difficult due to increased international scrutiny of UAE banks, one ready option is the use of rupee. But Russia has a problem with that as it already has a huge pile of rupee, estimated at over $2 billion, due to its defence transactions with India,” the source said.

Also read: ONGC chief expects Russian oil to make up 30% of India’s imports -Interfax

Russia is not able to use its rupee balance despite India and Russia successfully putting in place a rupee payment mechanism as it is not finding enough items from India to import. India’s trade deficit with Russia touched $43 billion in 2022-23 as it imported goods worth $49.35 billion while its exports were at $3.14 billion.

Russia has an option of investing its surplus rupee balance in India in bonds, government securities, or ventures but it has not yet shown much interest in it.