Russia is cutting down on its oil deliveries to India due to payment problems – Indians prefer paying in rupees, a currency Russians are not interested in. Additionally, there could be challenges for Russian oil exports as the U.S. is actively addressing transportation companies involved in shipping Russian oil to bypass Western sanctions. Apostrophe explored whether this will result in a decline in oil supplies from Russia to the global market and a reduction in the income that the Kremlin allocates for the war against Ukraine.
Oil in exchange for ships
Russia is currently encountering challenges in the payment process for its oil shipments to India. А situation attributed to the difficulties the country that committed military aggression against Ukraine faces in executing international transactions in a stable currency.
Due to sanctions, it is challenging to conduct international settlements in hard currency, which has currently fallen to less than 10%.Consequently, there is a need for alternative payment methods, either securing the same hard currency or, as a less preferable option, in Chinese yuan.
However, India is proposing to settle payments for Russian oil in rupees. This proves disadvantageous for Russia, because it has nothing to spend them on – since the import from India is significantly less than Russian exports to this country.
Additionally, Russian enterprises encounter obstacles in repatriating this non-convertible currency from their accounts in Indian banks.
In a previous initiative in August, Vice-Speaker of the Russian State Duma, Vladislav Davankov, suggested providing compatriots with complimentary tours to India as a strategy to utilize the rupees, received as payment for the supplied oil and stacked in bank accounts. Nonetheless, this proposal appears to have lacked support. Even if it was implemented, to fully expend the frozen funds would require to organize sightseeing tours to India for the entire population of Russia, possibly even multiple times.
Hence, the issue persists, particularly as Russian oil deliveries to India continue without an agreed-upon currency for transactions.
According to Reuters, citing sources, Russian Central Bank has informally advised domestic oil companies against accepting rupees as payment.
Simultaneously, Russians are leveraging the threat of redirecting millions of tons of oil to other nations if New Delhi continues to insist on payment in Indian currency.
In August, a provisional compromise was reached, resulting in payment being facilitated through a currency basket comprising the Chinese yuan, Hong Kong dollar, and UAE dirham. However, as of October, certain Emirati banks, wary of potential Western sanctions, have intensified scrutiny over transactions linked to Russia. Consequently, the viability of the dirham as the settlement currency between Russia and India is also significantly questionable.
Russia is encountering similar economic challenges with various nations, yet India has positioned itself as the second-largest purchaser of Russian oil following China after launching of the Russian invasion Ukraine and the resulting sanctions implementation. Despite India scaling back its Russian oil imports in recent months, it still constitutes more than 60% of all maritime shipments of Russian oil.
It іs apparent that Russia, the country waging an unjust and unlawful war with Ukraine, does not intend to relinquish such a substantial buyer. Consequently, Russia will persist in delivering oil to India while concurrently exploring payment options that are agreeable to both parties.
‘There will inevitably be a temporary reduction in purchases. Whether India becomes the third or fourth largest in terms of Russian oil acquisitions is not of paramount importance. I guess, the acquisitions will persist,’ Mykhailo Honchar affirmed, President of the Center for Global Studies ‘Strategy XXI’, in his comment to Apostrophe.
According to him, India will continue to insist on settling payments for Russian oil in rupees, and Russia will need to reckon with this reality, as it is imperative for them to sell their oil regardless.
‘Currently, the primary concern is finding a strategic application for the accumulated rupees. Russia has initiated a project in India, ordering the construction of 24 river-sea class vessels tailored for deployment in the Caspian Sea. The contract extends until 2027, and these vessels will be financed using the rupees received as payment for oil deliveries, presenting a viable resolution to the situation. Moreover, there are ongoing discussions about potential collaborative shipbuilding ventures tailored for the Arctic region,’ Honchar detailed.
Crucially, it is noteworthy that the proceeds from oil sales to India will not be contribute to the Russian budget:
‘Russia needs immediate funds for the war budget, but rupees cannot be incorporated there. Hence, they are compelled to engage in protracted schemes of this nature’, Honchar explains.
Battle with the Shadow
It is plausible, however, that there will be a further substantial decline in Russian oil shipments shortly, extending beyond India. This is a consequence of the United States' decision to intensify oversight over firms transporting Russian oil sold at prices exceeding the sanctioned limit of $60 per barrel.
The U.S. is scrutinizing both legally authorized carriers and tankers from the so-called ‘shadow fleet’, strategically established by the Kremlin to bypass pricing sanctions.
According to Reuters, the United States is actively investigating approximately thirty carriers.
Additionally, it has come to light that three major Greek tanker companies—Minerva Marine, Thenamaris, and TMS Tankers—have opted against transporting Russian oil, driven by concerns about potential sanctions. Collectively, these companies control around 100 tankers capable to handle nearly all Russian export oil from Western ports in the Baltic and Black Seas.
With scrutinizing carriers, U.S. authorities are extending their interest to companies involved in insuring maritime shipments of Russian oil.
These unfolding developments may result in a substantial contraction of Russian oil exports. Already, Russian companies are grappling with a shortage of vessels for the transshipment of their oil.
According to Mykhailo Honchar,carriers who continue to transport Russian oil bypassing sanctions are entering a ‘time of great apprehension’.
‘They are reluctant to face repressive actions from the United States and other Western countries. However, a scenario might unfold where, for instance, Greek tankers currently flagged as Greek suddenly change their flag registrations,’ the expert explained. ‘In theory, China or even India, under certain agreements, might offer their flags. Nevertheless, despite their strong interest in obtaining cost-effective sanctioned oil, it is difficult to envision India and China openly challenging Western countries over sanction regimes. Therefore, this remains a speculative scenario. Nonetheless, such an option exists. For instance, there could be negotiations with the Indians, but at a discounted rate, let's say, at 50%, and in rupees.’
Regardless, the increased scrutiny of sanctions compliance will not erode Russia's export potential, as per Нennadiy Ryabtsev, Head of Special Projects at the Scientific and Technical Center "Psychea."
‘There is no outright ban on the shipment of Russian oil. Instead, there are limitations on availing the services of insurance and transportation companies registered in London, Amsterdam, Rotterdam, and Antwerp. If a tanker is insured, for example, by Lloyd's (a major global insurance corporation based in London), it is prohibited if the contract value exceeds $60 per barrel’, the expert explained in his comment to Apostrophe.
Hence, he pointed out that the currentintensificationby Americans, as well as the British and the European Commission, is not aimed at halting Russian oil shipments but rather at preventing Russia from evading previously imposed sanctions: ‘Regrettably for Ukraine, a complete prohibition of Russian oil shipments is not a viable option.’
Indeed, when the West imposed sanctions on Russian oil a year ago, the intention was to keep it in the global market to avoid a shortage while simultaneously depriving the aggressor country of excessive revenue from oil exports.
‘Russia has already lose excess revenue – it is compelled to sell its oil at a lower price than it could have without these sanctions,’ Hennady Ryabtsev explains. ‘What factors are into the price? The cost of extraction, handling, transportation, freight, insurance, and payment conversion. So why is the contract price above $60 per barrel? Due to risks, all expenditures are higher.’
He mentions that Western media frequently misinterpret data on Russian budget gains from oil exports:
‘They imply a pricing mechanism that is familiar to them. In reality, Russian oil companies and, consequently, the Russian budget, end up with very little.’
Therefore, despite the claims from Russian propaganda, sanctions are proving effective, and their impact will be even more pronounced as loopholes enabling evasion are closed.
‘Sanctions are like a barrel, yet this barrel has numerous leaks. Plug one, then another, and a new leakage emerges’, Ryabtsev says.
Furthermore, he notes that Western media inaccurately assesses Russia's oil revenues: 'They made their calculations in dollars. However, how do you convert Indian rupees into dollars? You can't. This crucial aspect is often overlooked, leading to the assumption that these money are in the Russian budget. Yet, they are not.'
Additionally, the reduction in Russia's budgetary revenues, primarily stemming from oil exports, limits its capacity to finance the war against Ukraine. Consequently, Ukrainian victory is brought into closer reach.