Daily Management Review

The US Dollar's Decades-Long Dominance Is Being Undermined By India's Oil Buying From Russia


Sanctions imposed by the United States on Russia have begun to erode the dollar's decades-long hegemony over international oil trade, as most transactions with India, Russia's main seaborne crude export market, have been settled in other currencies.
The dollar's dominance has been called into question on numerous occasions, but it has persisted due to the overwhelming benefits of conducting business in the most widely accepted currency.
In response to the turmoil of sanctions and the Ukraine war, India's oil trade provides the strongest evidence yet of a long-term shift into other currencies.
The country is the world's third largest importer of oil, and Russia has emerged as its primary supplier after Europe rejected Moscow's supplies following its invasion of Ukraine, which began in February last year.
After an anti-war coalition imposed an oil price cap on Russia on December 5, Indian customers paid for most Russian oil in non-dollar currencies such as the UAE dirham and, more recently, the Russian rouble, according to multiple oil trading and banking sources.
The transactions in the last three months total several hundred million dollars, according to the sources, in a previously unreported shift.
The Group of Seven economies, the European Union, and Australia agreed late last year to impose a price cap on Russian oil, prohibiting Western services and shipping from trading it unless it is sold at a forced low price to deprive Moscow of funds for its war.
Three sources with direct knowledge said that some traders based in Dubai and the Russian energy giants Gazprom and Rosneft are looking for non-dollar payments for specific niche grades of Russian oil that have recently been sold above the $60 per barrel price cap.
The sources requested anonymity due to the delicate nature of the subject.
The sanctions, which U.S. officials and analysts predicted could be avoided by non-Western services, such as Russian shipping and insurance, do not appear to have been broken by those sales, which make up a small portion of Russia's overall sales to India.
According to the trade sources and former Russian and American economic officials who spoke to Reuters, some of the transactions were backed by three Indian banks as Moscow attempts to de-dollarize its economy and traders in order to avoid sanctions.
The United States and Britain last month added Moscow and Abu Dhabi-based Russian bank MTS to the list of Russian financial institutions subject to sanctions, making it more difficult to continue paying for Russian oil in dirhams.
The trade sources claimed that MTS had facilitated some non-dollar payments for Indian oil. A request for comment from Reuters was not immediately answered by MTS or the US Treasury.
The majority of Russian banks have been subject to sanctions since the war, according to an Indian refining source, but Indian buyers and Russian suppliers are adamant about continuing to trade Russian oil.
"Russian suppliers will find some other banks for receiving payments," the source told Reuters.
"As it is, the government is not asking us to stop buying Russian oil, so we are hopeful that an alternative payment mechanism will be found in case the current system is blocked."
For many years, paying for oil in dollars has been a nearly universal practice. According to January data from payment system SWIFT, the currency's percentage of all international payments was 40%, which is significantly less than the overall percentage.
The dollar is unrivaled in strength, according to Daniel Ahn, a former chief economist at the U.S. State Department who is now a global fellow at the Woodrow Wilson International Center for Scholars, but the sanctions risk undermining the financial systems of the West while falling short of their intended goal.
"Russia's short-term efforts to try and sell things in return for currencies other than the dollar is not the real threat to Western sanctions," he said.
"(The West) is weakening the competitiveness of their own financial services by adding yet another administrative layer."
The price cap came into effect at the same time that the EU imposed an embargo on the import of Russian seaborne oil, capping a year of sanctions and bans that included Russia's significant expulsion from the SWIFT global payments system.
About $640 billion worth of its gold and foreign exchange reserves were frozen, or about half.
In response, Russia declared that it would only accept payment for its energy in the money of "friendly" nations, and last year it ordered "unfriendly" EU member states to pay for their gas in roubles.
According to independent analyst and former adviser at the Bank of Russia Alexandra Prokopenko, payments were blocked or delayed for Russian companies even though they were not breaking any sanctions as a result of overly zealous compliance. This made dollars potentially a "toxic asset" for the country.
"Russia desperately needs to trade with the rest of the world because it's still dependent on its oil and gas revenues so they are trying all options they have," she told Reuters.
"They're working on building a direct infrastructure between the Russian and Indian banking systems."
Russia has a nostro account, or foreign currency account, for State Bank of India, the largest lender in India. In a similar vein, numerous Russian banks have opened accounts with Indian banks to promote trade.
In the month following Russia's invasion of Ukraine, IMF Deputy Managing Director Gita Gopinath warned that sanctions against Russia could weaken the dollar's hegemony by promoting the growth of smaller trading blocs using alternative currencies.
"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. The IMF did not respond to a Reuters request for comment.
Aside from Russia, tensions between China and the West are undermining long-established norms of dollar-dominated global trade.
Russia holds a significant portion of its currency reserves in renminbi, while China has reduced its holdings of dollars. Russian President Vladimir Putin stated in September that Moscow had agreed to sell gas supplies to China in yuan and roubles rather than dollars.
According to the Paris-based International Energy Agency, India has surpassed Europe as Russia's top customer for seaborne oil in the last year, snapping up cheap barrels and increasing imports of Russian crude 16-fold since the war began. Russian crude accounted for roughly one-third of total imports.
While India does not recognize the sanctions against Moscow, the majority of Russian oil purchases in any currency have complied with them, according to trade sources, and almost all sales have occurred at prices below the price cap.
Nonetheless, most banks and financial institutions are wary of clearing any payments in order to avoid inadvertently violating any international law.
According to trade sources, payments for Indian refiners that have recently begun settling some Russian oil purchases in roubles have been processed in part by the State Bank of India through its nostro roubles account in Russia.
According to the sources, the majority of these transactions are for oil purchases from Russian state energy giants Gazprom and Rosneft.
There were no comments from the banks, Gazprom and Rosneft.
According to the sources, Bank of Baroda and Axis Bank handled the majority of the dirham payments.
According to the sources, India has prepared a framework for settling trade with Russia in Indian rupees if further sanctions prevent rouble transactions.
When asked for comment, the US Treasury referred to a statement made by US Treasury Secretary Janet Yellen two weeks into the war: "I don't think the dollar has any serious competition, and I don't think it will for a long time."