A recent media report on Pakistan buying discounted Russian crude oil in Chinese currency, did not surprise many. India, on the other hand has reportedly asked its banks and traders to avoid using Chinese Yuan for Russian imports.

It may just be optics, says Lauri Myllyvirta, lead analyst, Centre for Research on Energy and Clean Air. “Which currency is used for transactions has no real meaning, since everyone converts their currency holdings after the transactions. If there was a serious attempt to block payments to Russia for oil in hard currency then this could have some significance, but as we have discussed, the US, EU etc. want third countries to be able to import Russian oil,” he said.

India, which has emerged as one of the top buyer of Russian oil, is said to be using UAE Dirhams to settle trade. But there is growing concern that this too will become a challenge.

As energy expert Narendra Taneja puts it, “The entire conventional international payment system is disrupted following the Western sanctions against Russia over Ukraine. But the world needs Russian oil to keep the global crude prices in check. China, a big importer of crude from Russia, faces no challenge as the volume of trade between the two countries is very large and therefore it can easily pay in its own currency.”

Taneja says India and Russia will find a solution to the payment issue soon. “It could be part payment via a mutually acceptable Rupee-Rouble mechanism by the Indian refiners and part by persuading the Russian oil exporters to invest in the Indian energy sector, including LNG import terminal, refinery, oil and gas infrastructure and petroleum strategic reserves etc. I am sure New Delhi and Moscow will work out a new way forward on the issue soon,” he said.

According to Swasti Rao, Associate Fellow at the Europe and Eurasia Center, Manohar Parrikar Institute for Defence Studies and Analyses, “Russia would have happily agreed to sell crude oil at discounted rates and free-on-board (just like for India ) because Pakistan has agreed to pay in a currency that Russia can use towards its war efforts (unlike rupees that cannot be used in Russia and that Russia has not invested back in India yet).”

“Despite warning Pakistan for months of consequences if it turns out that it is sending weapons to Ukraine, Russia brushed aside all “consequences” rhetoric and clinched an oil deal with Pakistan. This could be because Pakistan-Russia oil deal for Pakistan, will cover almost 60-65 per cent of its requirements therefore, a major breather for a country nearing economic collapse,” she said.

Russia’s worries

“It also shows the vulnerability of Russia’s oil trade re-routing that is unable to fetch more revenues despite efforts at cutting down production at OPEC+ level to boost prices. Drastic fall in revenues have begun since the oil ban and price cap have come into effect in the end of December 2022. The impact can be seen in 2023 where the energy revenues are down almost by a 45 per cent and the economy has incurred a deficit of about $42 billion by the end of May 2023. On a brighter note, it provides an opportunity for Russia to diversify its sales strategy to ensure resilience of its energy trade,” she said.

Also, in case of Russia-Pakistan oil deal, China has been a facilitator, she said adding “It has been supporting Pakistan for a while. The only conceivable reason why Pakistan oil deal has happened is because Islamabad has agreed to make the payments in Yuan. Dollar and Euro payments are affected due to the sanctions on Russia. Only friendly currencies like Yuan are welcome in Russia by which Moscow can support the rising cost of its protracted war in Ukraine.”

Alternative mechanism

Then what should be India’s plan B to avoid situations like this? “There already are parallel payments mechanisms but they work best as plan B. They are not enough to replace the dollar,” Rao said.

Why isn’t the Rupee-Rouble payment mechanism taking off? According to Rao, there are two reasons: First, there are reservations on rupee-rouble convertibility as the Rouble’s value is propped up by capital controls and not determined by the market. As a result there is always uncertainty on the real value of the Rouble.

Second, the unprecedented rise in oil trade between India and Russia in one year alone has led to a massively ballooning trade deficit. India’s trade deficit with Russia stands at $34.79 billion, second only to its trade deficit with China.

This has led to staggering amounts of Indian rupees in Russian banks that cannot be used by Russia in its war efforts. In fact, apart from roadblocks in oil payments, the last two consignments of S 400 air defence systems too have not been delivered to India due to failed attempts at payment mechanisms.

“Russia has refused any more payments in Indian rupees and India has refused to pay in Yuan. Talks are on to explore other options like the Dirham but no decision has been taken yet. The only way out of this deadlock is to make payments in friendly currencies. Bulk of payments so far have been made in Dirhams, but the catch is the Dirham is pegged to the Dollar. So India’s oil trade with Russia is not leading to de-dollarisation, in fact it is strengthening it due to lack of options,” she added.

India is buying Russian oil because it is economically viable, though it may not be as cheap as New Delhi would have liked it to be. Use of alternate payment systems can only work as plan B to a small number of international transactions.

Dollar’s domination

“Dollar is not getting replaced for the foreseeable future. Any country that wants its currency to be become the global reserve currency or global trading currency must have transparency in their capital systems. As long as currency values are fixed by capital controls of a central bank, like in the case of Yuan or Rouble, traders and investors cannot trade in it. Global trade can be done only in currencies like the dollar or the euro with floating transparent rates or those like the Dirham that peg its value to reserve currencies.” Rao said.

For India to secure its energy supply it should have a plan B to meet the fiscal shocks, that are likely to emanate from geopolitical tensions. Some experts believe that it would need to work its strategy on a case-to-case basis. To ensure its energy security and cushion itself from geopolitical shocks, India needs to diversify its energy sourcing basket and have an alternative payment mechanism.

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