Russia and India undermine dollar with help of energy market
2023.03.08 02:38
Russia and India undermine dollar with help of energy market
By Tiffany Smith
Budrigannews.com – The majority of agreements with India, Russia’s primary market for seaborne crude, have been settled in other currencies as a result of U.S.-led international sanctions against Russia. This has begun to undermine the dollar’s decades-long dominance of international oil trade.
Despite the overwhelming benefits of using the most widely accepted currency for business, the dominance of the dollar has continued despite periodic challenges.
The strongest evidence to date of a shift toward other currencies that could last is India’s oil trade in response to sanctions and the war in Ukraine.
Russia became the country’s top oil supplier after Europe rejected Moscow’s supplies following Russia’s invasion of Ukraine in February of last year. The country is the third largest oil importer in the world.
Multiple oil trading and banking sources stated that Indian customers have paid for the majority of Russian oil in non-dollar currencies, including the United Arab Emirates dirham and most recently the Russian rouble, since a coalition opposed to the war imposed an oil price cap on Russia on December 5.
The sources added that the total value of the transactions over the past three months amounts to several hundred million dollars, a shift that has not previously been reported.
Late last year, the economies of the Group of Seven, the European Union, and Australia came to an agreement on a price cap that prevents Western shipping and services from trading Russian oil unless it is sold at a forced low price to deprive Moscow of funds for its war.
Gazprom, a Russian energy company, and some traders based in Dubai (MCX: Three people with direct knowledge stated that GAZP) and Rosneft are looking for non-dollar payments for specific niche grades of Russian oil that have recently been sold above the $60 per barrel price cap.
Due to the sensitive nature of the matter, the sources requested anonymity.
These sales do not appear to violate the sanctions, which U.S. officials and analysts predicted could be circumvented by non-Western services like Russian insurance and shipping. They also make up a small portion of Russia’s total sales to India.
Some of the transactions were backed by three Indian banks, according to trade sources and former Russian and U.S. economic officials who told Reuters that Moscow is trying to de-dollarize its economy and traders to avoid sanctions.
However, the United States and Britain’s recent addition of the Moscow-based and Abu Dhabi-based Russian bank MTS to the list of Russian financial institutions subject to sanctions could make it more difficult to continue paying for Russian oil in dirhams.
According to trade sources, MTS had facilitated some non-dollar payments for Indian oil.
According to a source in the Indian refining industry, although most Russian banks have been subjected to sanctions since the war, Indian customers and Russian suppliers are determined to continue trading Russian oil.
“We are hopeful that an alternative payment mechanism will be found in case the current system is blocked,” the government said. “As it is, the government is not asking us to stop buying Russian oil.”
For many decades, almost everyone has paid for oil in dollars. According to SWIFT data from January, the currency’s share of total international payments is significantly lower, at 40%.
According to Daniel Ahn, who is now a global fellow at the Woodrow Wilson International Center for Scholars after serving as chief economist at the U.S. State Department, the strength of the dollar is unmatched, but the sanctions could undermine the West’s financial systems while failing to achieve their goal.
He stated, “The real threat to Western sanctions is not Russia’s short-term efforts to try to sell things in return for currencies other than the dollar.”
“By adding yet another administrative layer, (the West) is weakening the competitiveness of their own financial services.”
The price cap came at the same time that the EU imposed a trade embargo on Russian seaborne oil imports. This capped off a year of bans and sanctions, most notably excluding Russia from the SWIFT global payments system.
It had frozen approximately half of its gold and foreign exchange reserves, which were close to $640 billion.
In response, Russia stated that it would accept “friendly” currencies as payment for its energy and instructed “unfriendly” EU nations to pay for gas in roubles last year.
According to Alexandra Prokopenko, an independent analyst and former adviser at the Bank of Russia, dollars became potentially a “toxic asset” for Russian businesses as payments were blocked or delayed despite the fact that they were not in violation of any sanctions.
She stated, “Russia is trying every option they have because it’s still dependent on its oil and gas revenues and desperately needs to trade with the rest of the world.”
“They are constructing a direct infrastructure between the banking systems in India and Russia.”
State Bank of India, the largest lender in India, has a nostro account in Russia for foreign currency. In a similar vein, to make trade easier, numerous Russian banks have opened accounts with Indian banks.
Gita Gopinath, Deputy Managing Director of the IMF, stated a month after Russia invaded Ukraine that sanctions on Russia could weaken the dominance of the dollar by encouraging smaller trading blocs to use other currencies.
She stated to the Financial Times, “The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible.”
The long-standing norms of dollar-dominated global trade are also being undermined by tensions between China and the West, in addition to Russia.
While China has reduced its dollar reserves, Russia holds a portion of its currency reserves in renminbi, and Russian President Vladimir Putin stated in September that Moscow had agreed to sell China gas supplies for yuan and roubles rather than dollars.
The International Energy Agency, based in Paris, says that India overtook Europe as Russia’s top seaborne oil customer last year by buying cheap barrels and increasing imports of Russian crude 16 times more than before the war. About a third of Russia’s total imports were crude.
According to trade sources, despite the fact that India does not recognize the sanctions imposed on Moscow, the majority of purchases of Russian oil in any currency have complied with them, and almost all sales have taken place below the price cap.
However, in order to avoid unintentionally violating any international law, the majority of banks and other financial institutions are cautious when clearing payments.
According to trade sources, the State Bank of India’s nostro roubles account in Russia has partially processed payments for Indian refiners that have begun settling some Russian oil purchases in roubles in recent weeks.
The sources added that the majority of those transactions are for oil purchases from Russian state energy giants Rosneft and Gazprom. The sources added that the majority of the dirham payments have been handled by Axis Bank and Bank of Baroda.
According to the sources, India has prepared a framework for settling trade with Russia in Indian rupees in the event that additional sanctions prevent rouble transactions.
When asked for comment, the U.S. Treasury referred to the statement made two weeks into the war by U.S. Treasury Secretary Janet Yellen: The dollar doesn’t have any serious competition, and I don’t think it will for a long time.”
