India and sanctions-hit Russia are thinking about using the opportunity of China’s yuan as a reference currency to value the rupee-ruble trade mechanism, two Indian government officials aware of the development said. The two countries may also look at a floating rate arrangement as India, the world’s third-largest oil importer, considers buying oil from Russia at a discounted rate to cool inflationary pressures.
To boost oil purchase from Russia, India is working to resolve key issues, including the availability of ships, insurance cover for imports and the oil blends, given the configuration of Indian refineries. This assumes importance given the Western sanctions on Russia and PJSC Rosneft Oil Co. stating that Indian companies can acquire stakes in Russian projects and purchase Russian crude oil.
Rosneft’s production cost per unit is considered to be among the lowest globally. “Rupee-ruble trade is very much on the cards. We are working on a currency arrangement to facilitate trade, especially as we also plan to increase oil purchase from Russia," said one of the two Indian government officials cited above, requesting anonymity.
The rupee-ruble trade mechanism will allow Indian exporters to be paid in rupees for their exports to Russia instead of dollars or euros. Under this arrangement, a Russian bank is required to open an account in an Indian bank while an Indian bank opens an account in Russia. Incidentally, the rupee-ruble payment mechanism with Russia has been attempted earlier on a small scale for a few items such as tea.
“We can look at a floating exchange rate system. A third currency can be taken as a point of reference, maybe yuan," said the official. He added that the arrangement would not require the exchange rate to be pegged to any currency, especially as the ruble has been depreciating. The ruble has fallen by as much as 39% this year against the dollar. The local currency trade mechanism is key to resuming trading with Moscow as India buys a lot of defence and nuclear products from Russia, while India exports pharmaceuticals, engineering and agriculture items.
Payments worth close to $500 million to Indian exporters for goods already shipped to Moscow remain stuck. Meanwhile, the Reserve Bank of India is consulting banks, including UCO Bank, to appoint a third party for facilitating payments. UCO Bank acted as a facilitator when sanctions were imposed on Iran. Queries sent to India’s ministries of finance, petroleum and natural gas on Sunday remained unanswered till press time. Also, emailed queries to spokespeople for the Reserve Bank of India on Sunday evening wasn’t immediately answered.
Under the currency arrangement, the Russian currency will be converted into rupees at a specified exchange rate, and the money will be deposited into an Indian bank account. “We are yet to finalize the Russian and Indian banks," said another government official. Russian oil-related exports to India are close to $1 billion, but the exports are still very small given that the South Asian country imports 85% of its oil and 55% of natural gas requirements.
“Increasing oil purchases from Russia is definitely being considered at a discounted price. But we need to resolve a few issues to make that happen. One is we need to figure out the availability of shipping vessels. The other pertains to the high insurance premiums for imports from Russia," said the second government official. “High premiums will erode all the benefits of the discounted price. Also, the refining capability and cost will need to be assessed as we buy a different blend," the official added. He added that India need not worry about buying oil from Russia as long as Europe continues to buy from there.
While the European countries have exempted Russian banks involved in energy trade from sanctions due to their heavy dependence on Russian oil, the US has announced a complete ban on the import of all Russian oil products from 8 March. Oil prices have been elevated since Russia invaded Ukraine last month. On 7 March, Brent touched $139.13 per barrel, the highest since 2008. On Friday, the May contract of Brent on the Intercontinental Exchange closed at $112.67 per barrel. With Russia losing 0.7 million barrels per day of oil exports to the US and likely to see a reduction of sales to Europe over time, Moscow is looking to find new buyers. In 2020, Russia produced about 12% of the world’s oil and about 16% of the world’s natural gas.