INDIA-RUSSIA OIL TRADE

INDIA-RUSSIA OIL TRADE

CONTEXT:

• The recent surge in oil trade between India and Russia has led to various issues related to payments and deficits.

MORE ABOUT THE NEWS:

• India surge in importing oil from Russia, is getting tougher for the country to pay for it.
• On the one hand, it faces repercussions of breaching the oil price cap of $60 a barrel put in place by the U.S. and European nations as Russia offers lower discounts on its crude.
• On the other hand, using currencies like the Chinese yuan for payments, has its own geopolitical ramifications.

CURRENT STATUS OF OIL IMPORTS FROM RUSSIA:

• Until a year ago, most of India’s oil imports came from West Asia, the U.S., and West Africa.
• Currently, a bulk of crude unloading at India’s ports is likely to be coming from Russia.
• In February 2023, Russia surpassed Saudi Arabia to become the second biggest exporter of crude oil to India in FY23.
• Russia found a ready market for its goods, especially crude oil, in India and offered steep discounts.
• India, meanwhile, unlike the West, chose to not join the list of countries formally imposing sanctions on Moscow.
• As a result, India’s imports of crude oil from Russia increased nearly 13 times in 2022-­23 to over $31 billion from less than $2.5 billion in 2021-­22.

• Russia is now the largest supplier of oil to India, displacing traditional players such as Iraq, Saudi Arabia, and UAE.
• In the four ­month period between November 2022 and February 2023, Russia took over the top spot from Iraq.
• An analysis by Reuters showed how India accounted for more than 70% of the seaborne supplies of Russian ­grade oil under $60 dollars a barrel in May.

PAYMENT CRISIS FOR OIL IMPORTS :

• As the U.S., the EU, and the U.K. have blocked multiple Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global secure interbank system.
• An estimated $500 million is pending for goods already shipped by Indian exporters to Russia and it is now not possible to get the payments through the SWIFT channel.
• Thus, in an effort to economically strain Russia, the West targeted one of its biggest traded goods I.e.energy for which transactions have traditionally been dollar­ dependent.
• Besides an oil ban jointly agreed between multiple countries last year, it was also decided to cap the price to a maximum of $60 per barrel of Russian oil transported through waterways.
• While India is not a formal signatory, it has tacitly agreed to maintain the price cap as much as possible.
• Besides, banks and traders may not want to get involved in transactions that breach the oil cap over fears of repercussions for their funds.
• Until recently, the blends of oil India was importing from Russia were largely below the price cap fixed by G­7 countries.
• India was able to pay for the oil using dollars.
• However recently, Russia has lowered its discounts due to high demand from China and lower grade oil is now in short supply.

WHAT NEEDS TO BE DONE ?

• Notably, India was in negotiations with Russia to reactivate the rupee-­rouble trade arrangement.
• However, media reports showed in May that the rupee-­rouble payment mechanism could not take off.

There are a couple of reasons for this —

• Scepticism on the rupee-­rouble convertibility as the rouble’s value is kept up by capital controls and not determined by the market, as in the case of reserved currencies.
• On the flip side, Russia has also pointed out that it finds the rupee to be “volatile”.
• The unforeseen surge 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 touched $43 billion in 2022-­23 as it imported goods worth $49.35 billion while its exports were at $3.14 billion.

• This has led to staggering amounts of Indian rupees in Russian banks that cannot be used by Russia in its war efforts.

WAY FORWARD:

• According to experts there are concerns regarding India using yuan, as how that would appear geopolitically as it continues to have strained ties with Beijing since the border standoff.
• India can counter the deficit with Russia by getting it to make investments in energy projects in India or to invest in government bonds.

SYLLABUS: MAINS, GS-3, ECONOMY

SOURCE: THE HINDU