In Retrospect


The Western embargo on Russian oil has only nudged the transcontinental nation to diversify its oil trade in currencies other than the dollar — challenging the five-decade-long dollar dominance and paving way for the emergence of a new Eurasian bloc comprising Russia, China, India, Iran, Saudi Arabia et al


Russia has emerged as the single largest supplier of crude oil which is converted into petrol products at refineries. India’s imports from Russia jumped about five times to USD 41.56 billion during the April-February period of FY 2022-23. India’s imports of crude oil from Russia soared to a record 1.6 million barrels per day in February and are now higher than combined imports from traditional suppliers Iraq and Saudi Arabia. India buys more than one-third (around 35 per cent) of its imported crude from Russia. In February 2022, before the start of the Russia-Ukraine war, Russia’s share in India’s crude imports was negligible.

Iraq, the second largest oil source for India, supplied 9,39,921 barrels per day (bpd) of oil in February while Saudi Arabia supplied 6,47,813 bpd of oil. UAE overtook the US to become the fourth largest supplier at 4,04,570 bpd. The US supplied 2,48,430 bpd, down from 3,99,914 bpd in January. India sources crude oil

from 39 countries. The rise in Russian imports has been at the expense of Saudi Arabia and the United States. Oil imports from Saudi fell 16 per cent month-on-month and that from the US declined by 38 per cent.

India is the world’s third-largest importer of crude oil after China and the USA. Russian crude is now available at a discount after a few major NATO members have shunned it as a means of punishing them for ‘invading Ukraine’. Nearly 50 per cent of India’s total gas requirements came from abroad, but mostly from the Gulf States with very little from Russia. China imports most of its gas via pipeline from Central Asia. Currently, Turkmenistan is the largest supplier. There’s been a noticeable increase this year in LNG imports from Russia, although most of China’s LNG still comes from other countries. China has also signed new deals to transport Russian LNG by sea via the Arctic.

Major beneficiaries

Domestic private refiners are enjoying a boost in refining margins from processing discounted Russian crude. Quoting the cargo data tracker Vortexa, ‘The Economic Times’ reported that Reliance Industries and Russia-backed Nayara Energy (formerly Essar Oil,) together took 45 per cent of all the Russian oil imported by India since the outbreak of the Ukraine war, far higher than their 35 per cent share in the domestic refining capacity. These companies buy the cheaper oil, refine it and sell it back at a big markup to European nations. Newspaper reports suggest that nearly one-third of Reliance’s crude oil purchase is now from Russia, which was only at 5 per cent before the war began. This also means that public sector refiners such as Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum are getting only a small share of the Russian oil. But these public refiners are the ones that supply more than 90 per cent of the average Indian’s fuel needs. So, the companies that refine and export to other nations garner the bulk of cheaper Russian oil imports vis-à-vis companies that supply fuel to the common man. The average Indian has not been able to reap the benefits of cheaper Russian oil imports while private refiners are reaping record profits.

Financing the import

Almost immediately after Russian President Vladimir Putin ordered troops into Ukraine the Western alliance imposed sanctions that were more stringent than ever before. It was an economic war of unprecedented proportions. The most important of the sanctions targeted the financial sector. The US Treasury took measures that effectively immobilized any assets of the Central Bank of the Russian Federation (CBR) held in the US or by US persons, wherever located. The US’ European allies acted almost in sync to prevent the CBR from deploying its international reserves and also decided to remove select Russian banks from the SWIFT messaging system to ensure that these banks were disconnected from the international financial system, thus blocking their global operations. Eventually, seven banks were taken down from SWIFT.

The US escalated the sanctions in early April by imposing full-blocking sanctions on Sberbank, Russia’s largest state-owned bank, and Alfa-Bank, the country’s largest private bank. These sanctions were intended to lock out Russia from international finance, writes Biswajit Dhar.

In May 2022, India bought Russian oil at a discount of USD 16 a barrel. Though the discount was reduced and was at USD 14 a barrel in June, USD 12 a barrel in July, and USD 6 a barrel in August, India is estimated to have saved over Rs 35,000 crore by importing cheap Russian crude between February and November 2022. As per another estimate, the discounted Russian crude is likely to have resulted in savings of around USD 2.5 billion in the first three quarters of the current FY 2022-23. The savings, while substantial for India, are far lower than what many had anticipated amid reports of deep discounts being offered by Russia. As per the report, cheaper Russian oil lowered the average landed price of imported crude for India by just about USD 2 per barrel during the nine-month period of February to December 2022.

Although the price of Russian crude oil is attractive, India’s refineries have faced a challenge trying to finance purchases, because sanctions on Russian banks are affecting payment transactions. One of the options India considered was a system based on local currencies, where Indian exporters to Russia get paid in Ruble instead of US dollars or euros and imports are paid for in rupees. That hasn’t worked out though China’s state-owned oil enterprises are increasingly using the Chinese renminbi rather than the dollar to finance oil purchases.

Quoting an Indian official, ‘The Hindu’ reported that almost a quarter of the Russian imports are now paid in UAE’s dirham. But it is feared that continued payment in dirhams for Russian oil could become harder after the United States and Britain last month added Moscow and Abu Dhabi-based Russian bank MTS to the Russian financial institutions on the sanctions list. MTS had facilitated some Indian oil non-dollar payments. More recently payments are also made in the Russian Ruble. It is reported that three Indian banks have backed some of these

transactions, as Moscow seeks to de-dollarize its economy. Quoting an Indian refining source, ‘Reuters’ said though most Russian banks have faced sanctions since the war 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. 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. Those transactions are mostly for oil purchases from Russian state energy giants Gazprom and Rosneft. Bank of Baroda and Axis Bank have handled most of the dirham payments.

Ban on Russian oil

On December 5, 2022, the US, Canada, Australia, the United Kingdom and 27 countries of the European Union entered into an agreement to impose a price cap on Russian oil. They have resolved to not buy or provide the necessary insurance and maritime services to transport Russian oil at prices above USD 60 per barrel. In economic terms, they have formed a buyer’s cartel to reduce the prices of Russian oil, ostensibly to cripple Russia’s ability to continue its aggression in Ukraine. The embargo prevented other countries from using EU shipping and insurance services unless oil is sold below the cap. Responding to this ban, the Union Minister for Petroleum and Natural Gas said that there was no moral conflict in buying Russian oil, whereas the government has a moral duty to consumers to ensure they are supplied with energy.

Nearly half of Russia’s annual revenues come from oil, making it extremely dependent on the oil trade. The EU strategy of an outright ban on Russian oil was expected to result in skyrocketing oil prices that would adversely impact the whole world. So, the western bloc of nations formed a buyer’s cartel to allow Russia to sell its oil —to avoid a global oil shock — but at the same time, minimize its revenues to handicap Russia’s war efforts.

Russia began diverting oil supplies from its traditional markets to countries in Asia after Europe — its largest market — imposed sanctions on Moscow. India and China have become the largest buyers of Russian oil, benefiting from the discounted oil supplied by Russia. Russia has been selling oil at a discounted rate since March this year after the Ukraine invasion. In March, combined oil imports by China and India from Russia overtook those from the 27 EU member states. From late November, there appears to have been a renewed surge in oil purchases by India. Other countries have also taken advantage of discounted Russian crude – Sri Lanka which has been grappling with a severe economic crisis. Pakistan is making concerted efforts to procure Russian crude oil at USD 50 per barrel.

Apparently, the EU and G7 ban on Russian oil and gas has failed to achieve their objective of globally isolating Russia. Contrary to the mainstream view that Russia will be facing severe consequences of the western embargo on its oil trade there are indications that resilient Russia is redrawing the global trade order. Its economy and currency have weathered the sanctions and Russia’s trade with several nations has zoomed, led by oil. As per a new information note on the global economy, released by the WTO, following one year of the Ukraine crisis, global trade remained resilient and performed better than “pessimistic predictions’’ for 2022 as economies hit by Russia’s war in Ukraine found alternative sources of supply.

Eroding dollar’s dominance

Paying for oil in US dollars has been a nearly universal practice for decades since 1973 when the US dollar embraced crude oil as the new gold and migrated to the ‘crude equivalent standard from the ‘gold equivalent standard’ of 1944. Petrodollar or Petro currency refers to the US dollar traded for worldwide crude-oil exports. It facilitates the investment of export gains as the dollar is the world’s reserve currency. US President Richard Nixon withdrew the dollar from the gold standard on August 15, 1971, because of stagflation and USA’s dwindling gold reserve. In 1973, the Organization of the Petroleum Exporting Countries (OPEC) surged oil pricing within a

brief timespan. In 1973 the US and Saudi Arabia entered into an agreement and the US agreed to offer armed protection to Saudi Arabia, and provide weaponry and other military supplies. In return, Saudi Arabia, the leader of the Arab region and OPEC agreed to sell all oil in US dollars. Moreover, Saudi Arabia would recycle the surplus dollars into the American economic system using US treasury bills and bonds.

By 1975, all OPEC members embraced the Petro currency arrangement and consented to oil export in US dollars. As a result, the American currency got pegged, by default, to the crude oil price. If the crude price increases demand for the US dollar increases. Thus, the US dollar became the reserve currency for most central banks worldwide as the US dollar was the chief currency needed for natural gas and oil trading.

But the near dominance of the US dollar in global trade is declining. The January figures from the payment system SWIFT reveals that the US dollar’s share of overall international payments is much smaller at 40 per cent. Experts believe that the sanctions against Russia could have undermined the West’s financial systems while failing to achieve their aim.

It may be recalled that the IMF Deputy Managing Director Gita Gopinath said in March 2022, within a month after Russia’s invasion of Ukraine, that sanctions on Russia could erode the dollar’s dominance by encouraging smaller trading blocs using other currencies. Now Russia holds a chunk of its currency reserves in renminbi while China has reduced its holdings of dollars, Moscow has agreed to sell gas supplies to China for Yuan and Russian Ruble instead of dollars.

In 2022, tensions between the US and Saudi Arabia over issues related not only to the production of oil but also to the trading of oil in US dollars have revived fears over the future of the petrodollar system. In March 2022, relations between the US and OPEC member states became so tense, that leaders of Saudi Arabia and the United Arab Emirates (UAE) declined to arrange calls with US President Joe Biden as the US and its allies sought to contain a surge in energy prices caused by Russia’s invasion of Ukraine.

President Xi Jinping told Gulf Arab leaders during his visit to Saudi Arabia last December when various long-term agreements were signed between the two nations, that China would work to buy oil and gas in Yuan. This proposal is considered a move that would support Beijing’s goal to establish its currency internationally and weaken the US dollar’s grip on world trade. In addition to this, the recent China-brokered Saudi-Iran rapprochement represents Beijing’s first foray into Middle East mediation, an area that for the past few decades was largely occupied by Washington.


The 1973 USA-Saudi Arabia agreement changed the fate of the global economy and re-established the dominance of the US dollar. After the disintegration of the Soviet Union in the early 1990s, a unipolar world order emerged. After over three decades, a new economic and military power in China is challenging the American hegemony. A Eurasian bloc consisting of major economies like Russia, China, India, Iran, Saudi Arabia et al has emerged. A multipolar world order is the need of the hour.

Views expressed are personal

Next Story
Share it