The latest round of sanctions by the US, including on 183 oil tankers, to curb Russian crude exports to the world will significantly impact India’s rupee trade ambitions with Moscow, a senior government official said.
“Once you start sanctioning tankers, it is a kind of secondary sanction. India was doing a rupee trade with Iran only until secondary sanctions weren’t in place. After that, options for rupee trade will be much less,” the official said.
What are the US sanctions?
On January 10, the US Treasury imposed sanctions on Russian oil producers Gazprom Neft and Surgutneftegas, as well as 183 vessels that have shipped Russian oil, in a bid to limit Moscow’s ability to generate revenues to fund its war with Ukraine.
Secondary sanctions refer to measures that target third parties or countries by limiting their interactions with a sanctioned entity.
The US sanctions on oil tankers, known as 'shadow fleets', are widely expected to limit the flow of Russian crude oil to its largest consumers, such as India and China.
India-Iran trade
India had set up a Rupee-Rial trade mechanism with Iran to conduct trade in local currencies back in 2011. For India, Iran was one of the largest import-source nations for crude.
However, the practice entirely stopped by early 2019 after the then US President Donald Trump, during his first term, reimposed sanctions on the West Asian nation and pulled out of the nuclear deal with Iran.
Similarly, the outgoing Biden administration’s decision to widen sanctions against Russia’s energy sector could impact plans to establish a direct exchange rate around their local currencies between India and Moscow.
What is the India-Russia deal?
In a bid to boost trade between the two nations, the central banks of India and Russia are in talks to trade in local currencies by avoiding pegging the exchange rate with the dollar or any other third currency.
This move is in line with India’s efforts to spur exports to Russia, following a pledge between the two nations to increase bilateral trade to over $100 billion by 2030 during Prime Minister Narendra Modi's visit to Moscow last year.
India started exploring a rupee settlement mechanism with Russia soon after the invasion of Ukraine in February 2022, but this practice failed to pick up, given the skewed trade balance between the two sides.
Efforts to boost trade through transactions in local currencies became crucial, given India’s reliance on discounted oil from Russia.
India relies on imports for around 84 percent of its crude oil requirements, out of which about 30 percent currently comes from Russia.
Costlier crude oil
On whether the latest round of sanctions by the US could hit India’s ability to source cheaper crude oil from Russia, the official said that the government is on a wait-and-watch mode as the fine-print of this decision has been left to the incoming administration led by Donald Trump.
“They have given a 6-week transition period, and they have left the fine prints with the Trump administration. We have to wait for the Trump administration and the kind of fine print on this. Banks which do the transactions will have to be careful, they have to keep looking at the sanctioned list. So, if an entity is in the sanction list, they won’t allow that transaction to go through,” the official said.
There are also concerns that the latest development could increase India’s oil import bill since it may be compelled to reduce its reliance on Russian crude.
The official said that though shifting to other countries for the majority of India’s crude requirements could increase costs and lead to higher outflows in foreign exchange, the country has enough alternative sources.
“Two years back, we barely had any Russian oil buy. So, if it goes back to that level, it is not that there will be no oil to buy; it will mean higher foreign exchange outflow because we may not get the discounts we get from Russian oil from other sources,” the official explained.
India’s crude oil imports from West Asian suppliers, including Iraq and Saudi Arabia, are expected to rise in the coming months, with the US further tightening sanctions on Russia.
Oil prices climbed on January 17, heading for a fourth weekly gain, driven by concerns over tighter supply, following US sanctions on Russian oil producers and signals from a Federal Reserve official of potential interest rate cuts.
Brent crude futures rose 13 cents, or 0.2 percent, to $81.42 per barrel by 0113 GMT on January 17, after declining 0.9 percent in the previous session.
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