US-led international sanctions on Russia have begun to erode the dollar’s decades-old dominance of international oil trade as most deals with India – Russia’s top outlet for seaborne crude – have been settled in other currencies, informs Reuters.
The dollar’s pre-eminence has periodically been called into question and yet it has continued because of the overwhelming advantages of using the most widely-accepted currency for business.
India’s oil trade, in response to the turmoil of sanctions and the Ukraine war, provides the strongest evidence so far of a shift into other currencies that could prove lasting.
After a coalition opposed to the war imposed an oil price cap on Russia on Dec. 5, Indian customers have paid for most Russian oil in non-dollar currencies, including the United Arab Emirates dirham and more recently the Russian rouble, multiple oil trading and banking sources said.
An Indian refining source said most Russian banks have faced sanctions since the war but Indian customers and Russian suppliers are determined to keep trading Russian oil. “Russian suppliers will find some other banks for receiving payments,” the source told Reuters.
India’s largest lender State Bank of India has a nostro, or foreign currency, account in Russia. Similarly, many banks from Russia have opened accounts with Indian banks to facilitate trade.
IMF Deputy Managing Director Gita Gopinath said that sanctions on Russia could erode the dollar’s dominance by encouraging smaller trading blocs using other currencies. Paying for oil in dollars has been the nearly universal practice for decades. “The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she told the Financial Times.
Beyond Russia, tensions between China and the West are also eroding the long-established norms of dollar-dominated global trade.
India in the last year displaced Europe as Russia’s top customer for seaborne oil, snapping up cheap barrels and increasing imports of Russian crude 16-fold compared to before the war, according to the Paris-based International Energy Agency. Russian crude accounted for about a third of its total imports.
For Indian refiners that in recent weeks started settling some Russian oil purchases in roubles, according to the trade sources, payments have been processed in part by the State Bank of India via its nostro roubles account in Russia.
India has prepared a framework for settling trade with Russia in Indian rupees should rouble transactions be cut off by further sanctions, the sources said.
The Group of Seven economies, the European Union and Australia, agreed the price cap late last year to bar Western services and shipping from trading Russian oil unless sold at an enforced low price to deprive Moscow of funds for its war. It does not work as they wanted.