Key Highlights:

• U.S. Dollar Dominance: Decades of international oil trade using the dollar
• India’s Demand: Shift to rupee payments caused significant disruptions
• Russian Suppliers’ Restriction: Central bank guidance against deals in Indian rupees
• Trade Scrutiny: Increased attention exacerbating existing issues
• Sanctions Impact: Sanctions restricting Moscow from dollar and euro transactions

Following the assault on Ukraine, the West imposed several sanctions on Russia, prompting Russia to pivot its oil export strategy. However, the thriving oil trade, a linchpin of Russia’s economy, encounters a significant obstacle stemming from the intricacies involved in non-U.S. dollar payments. This hurdle has escalated notably post the imposition of Western sanctions amid the Ukraine conflict, presenting a conundrum without an imminent solution.

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Decades-long dominance of the U.S. dollar in global oil trade has proven undefeatable despite continuous endeavors to seek alternatives. Conversion complexities and political barriers persist as formidable roadblocks in these efforts.

India’s Stand and Its Impact

The recent upheaval in Russia’s oil trade came to a head when India, now a leading buyer of Russian seaborne oil after the retreat of European customers, insisted on paying in rupees. This stance led to an imminent collapse of trading activities, as reported by confidential sources familiar with the matter.

The sources, seeking anonymity due to the sensitivity of the issue, revealed that Russian oil suppliers, also unable to be named for similar reasons, were unable to execute deals in Indian rupees. This hurdle stemmed from informal guidance issued by the Russian central bank, indicating its non-acceptance of the currency.

A Russian banking source, closely linked to the Russian central bank, expressed the futility of accepting revenue in a non-convertible currency like the rupee, citing its limited value outside India. The dearth of opportunities for Russia to utilize rupees for imports from India further compounded the issue, according to another source.

Temporary Solutions

In a bid to resolve the impasse with Indian deals, at least two major Russian oil companies reportedly threatened to redirect nearly a dozen tankers—carrying up to a million tonnes of oil—destined for India, toward other destinations. As a stopgap measure, these cargoes were settled through a combination of the Chinese yuan, the Hong Kong dollar (used as a transition currency into the yuan), and the UAE dirham (pegged to the U.S. dollar), revealed ten trading sources and officials interviewed by Reuters.

Persistent Dollar Dependency

Despite the interim resolution in dealing with Indian transactions, the fundamental challenge of finding a viable alternative to the U.S. dollar remains. This issue not only impacts buyers in Africa, China, and Turkey—emerging as top consumers of Russian oil—but notably affects India, accounting for over 60% of Russian seaborne oil purchases, according to LSEG (London Stock Exchange Group)data and Reuters calculations.

The situation is poised to escalate further as the scrutiny of this trade intensifies. Recent developments saw Washington imposing initial sanctions on owners of tankers carrying Russian oil exceeding a Western price cap—an enforcement move marking the first instance since its introduction at the end of the late last year (2022).

The intricacies of Russia’s oil trade, exacerbated by currency complexities and geopolitical tensions, signify a challenging landscape. As the struggle for alternatives to the dollar persists, the resilience of this critical economic lifeline remains under scrutiny amidst the tumultuous geopolitical climate.

The Shift Away from the Dollar

Following the Western sanctions last year (2023), Moscow veered away from transacting in the world’s dominant currencies, dollars, and euros, significantly limiting access to the global banking system. An estimated less than 10% of Russia’s daily oil output of around 9 million barrels is currently sold in dollars and euros, as per insights from five involved traders.

The Russian central bank’s restriction from operating in dollars, due to sanctions, compelled exporters to steer clear of the currency, thwarting Western governments’ surveillance of their trade.

Rupee Challenges and Potential Resolutions

Trading in rupees poses significant challenges for Russia, aggravated by India’s stringent policies favoring rupee expenditures within its borders. According to insights from two Russian sources, India has imposed punitive exchange rates on rupee conversions into other currencies, sometimes exceeding 10% of the converted amount.

A potential resolution to this conundrum could arise if Russia amplified its imports from India, thereby enabling payments in rupees. However, the current trade dynamics reflect an inverse scenario, with India increasing its imports from Russia. Conversely, Russia predominantly imports cars, equipment, and various goods from China, contributing to an imbalance in trade dynamics.

Data from the Indian Commerce Ministry website revealed that India’s imports from Russia soared to $30.4 billion between April and September. This surge has widened India’s trade deficit with Moscow, now standing at $28.4 billion—a significant escalation compared to approximately $17 billion during the same period last year (2023).

Ivan Nosov, the head of Sberbank’s Indian branch, emphasized the need for Russian exporters to aid in bolstering India’s exports.

Amidst these trade complexities, India’s top refiner, Indian Oil Corp (IOC.NS), faces challenges in settling payments, particularly concerning the procurement of Russia’s light, sweet Sokol grade from the Sakhalin 1 project. Allegedly, the IOC encountered difficulties in payment due to the absence of an account in UAE dirhams by the supplying company designated for Sokol deliveries.

Despite repeated requests, the IOC refrained from commenting on the issue in response to Reuters’ inquiries.

Preferred Currencies and Ongoing Hurdles

Russian officials and oil executives have urged Indian buyers to adopt the Chinese yuan, a more favorable currency for Russia. However, India’s reluctance to use the currency of a regional rival remains a sensitive issue. Private Indian refiners have reluctantly reverted to using the yuan due to limited alternatives post the earlier standoff.

Attempts by Indian state refiners to switch to the UAE dirham faced complications, including additional clearing requirements amidst Washington’s stringent stance, prompting caution among other governments.

The recent clampdown by UAE banks on Russia-focused clients to ensure compliance with the price cap further complicates matters for the trade, signifying the growing intricacies surrounding Russian crude transactions.

Russia-Ukraine War: Impact on Bangladesh

The war in Ukraine has significantly impacted Bangladesh in three key areas.

Firstly, the disruption in the wheat market due to the conflict has major consequences for Bangladesh, which heavily relies on wheat imports, with Russia and Ukraine being significant suppliers.

Secondly, the conflict has led to a rise in vegetable oil prices globally, affecting Bangladesh’s market. While the country doesn’t directly import sunflower oil, the increase in prices across the vegetable oil sector, coupled with trade restrictions imposed by major exporters like Indonesia and Argentina, has heightened vulnerability. This has kept vegetable oil prices at record highs, impacting about 38% of Bangladesh’s total imported calories and a quarter of the dollar value of its total imports.

Thirdly, the conflict has disrupted the fertiliser market, crucial for Bangladesh’s agriculture, particularly in rice production. With Russia and Belarus being major fertiliser exporters, the export sanctions have affected Bangladesh’s potash imports. This disruption could lead to reduced rice production and potentially lower input use, impacting food security.

Moreover, rising global prices of corn and soybeans, of which Bangladesh imports a significant portion, affect the feed sector, increasing production costs for animal products. This further compound the food security challenges, particularly for staple products like wheat, vegetable oils, and rice.

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