India's soaring Russian oil imports making rupee payment mechanism futile

India’s love for discounted Russia oil is widening its trade deficit with Moscow and the casualty is their much-touted rupee trade plan. 
 

The gap between their exports and imports is rising and that’s making the local currency payment mechanism futile, people familiar with the matter said, asking not to be identified as the discussions are private. No payment has been initiated because Russian banks do not want excess rupee piling up, they said. 

New Delhi’s imports from Russia in eight months to November were almost 16 times its shipments to the nation, trade ministry data show. Russia’s war with Ukraine, which invited US-led sanctions, germinated the idea of rupee trade as India boosted its purchases of cheap oil from Moscow to contain a rising import bill amid high commodity prices. The mechanism worked as a template to draw out similar arrangements with other nations such as Mauritius and Sri Lanka.

Slow progress in the rupee trade with Russia could add to pressure on the local currency which slipped the most against the dollar among emerging Asian currencies in the past 12 months. India is betting on internationalization of the rupee to reduce dollar demand and make its economy less vulnerable to global shocks after current account deficit, the broadest measure of trade in goods and services, widened to a record in July-September.

Officials from the two nations met last month to discuss ways of enhancing exports to Russia in areas such as electronics so that the rupee trade mechanism can be brought back on track as traders mull other ways of settlement. 

The plan to allow overseas trade to be settled in rupees was announced by the Reserve Bank of India in July. Seven months later, the mechanism is largely limited to payments for import of defense equipment, the people said.

Payment in rubles is also a challenge because there is no fixed exchange rate for the currency, a Bharat Petroleum Corp. Ltd. executive, who didn’t want to be named, said, adding refiners would rather pay in the United Arab Emirates dirham which is pegged to the dollar. India’s biggest company by market value Reliance Industries Ltd., and BPCL are among Indian refiners using dirhams to pay for some shipments of Russian crude as they navigate Western sanctions. 

Spokespersons for the India’s external affairs and trade ministries didn’t immediately comment on the matter. 

Russia is now the biggest supplier of crude oil to India overtaking Iraq and Saudi Arabia. In December, the South Asian nation bought 1.2 million barrels of crude from Russia every day — a whopping 33 times more than a year earlier. 

While crude continues to dominate their bilateral trade, imports of items such as sunflower oil and fertilizers have also jumped in the past few months. As a result, India’s imports from Russia climbed more than 400% in eight months to November from a year earlier, while exports fell 14%, showing little success in the government’s efforts to improve outbound shipments.

“As far as we know , there has been no transaction in Indian rupees so far,” said Ajay Sahai, director general and chief executive officer of the Federation of Indian Export Organisations.