All the snags in the romance (and oil) between India and Russia
India and Russia have significantly strengthened economic relations, especially on energy. But Indian banks are resisting the idea of using the rupee-ruble mechanism: will it be a problem for oil trading?
Since the invasion of Ukraine on February 24 a year ago, Russia has seen its economic and political ties with the countries of the Western bloc plummet. At the same time, however, it has greatly strengthened commercial contacts with a developing and energy-hungry nation: India.
As Bloomberg columnist David Fickling wrote, in 2022 New Delhi bought large quantities of sanctioned Russian crude oil from the broader West, bringing Moscow's share of total energy imports to 25 percent. Before the war, it was almost zero.
INDIAN BANKS DO BETTER THAN RUPEE-RUBLE EXCHANGES
In short, the relationship between India and Russia is progressing, but not without some setbacks.
Last year, the two countries set up a rupee-ruble exchange mechanism (their respective currencies) to facilitate bilateral trade, reducing the risk of incurring US dollar-based sanctions.
However, Indian banks are not very willing to use this payment channel for reasons of "excessive prudence" towards Washington, the Russian ambassador to India, Denis Alipov recently admitted . To further facilitate trade, Russia's central bank is now considering opening a state-owned financial institution in India, according to Indian Express .
WHAT IS CONVENIENT FOR INDIA
Fickling points out that India would have many reasons to base its foreign trade on rupees and not on dollars. First, because many of its main partners, fromIran to the already mentioned Russia, are under US sanctions. And then because the Indian market is heavily dependent on imported crude oil, and payments in dollars – much stronger than rupees, which have lost 22 percent of their value in the last five years – subtract resources from state coffers.
RUSSIA SELLS CRUDE CRUDE ON CREDIT
Giving up the dollar isn't easy, though, writes Fickling. And meanwhile India's trade deficit with Russia is widening: already in 2021, before the boom in energy imports, New Delhi had purchased oil products from Moscow for 4.7 billion dollars, selling goods of all kinds to the other side for only 3.3 billion.
Russia is, in effect, selling crude oil to India on credit; and it's a significant risk, considering that Russia's budget deficit is at its highest in more than two decades.
OIL MOVEMENTS BETWEEN RUSSIA, INDIA AND EUROPE
Both the United States and the European Union are turning a blind eye to the euro-based oil trade between India and Russia: Indians buy barrels of crude oil from the Russians at discount prices, process it in their refineries and then resell it in the form of products refined in Europe. By doing so, India slightly reduces its overall trade deficit (refined products have a higher value than crude oil, which it buys cheaply) and helps to keep the European fuel market well supplied.
There is no contradiction with the sanctions. The purchase bans imposed by the European Union and the United States on Russian crude oil and petroleum products are not in fact intended to prevent Russia from exporting its hydrocarbons; they aim to prevent him from raising large sums of money from sales. The restrictions therefore aim to maintain a sufficient amount of oil supply on the global market, in order to avoid a price crisis, and at the same time to weaken the Russian economy through the decline in energy revenues (see the price cap and the discounts offered to India and China), so as to make it more difficult to finance the invasion.
The fact that India buys so much Russian crude oil, and eventually sells it to Europe in the form of diesel, is in short a calculated consequence of the sanctions.
INDIA HAS NO MARKET FOR FINE RUSSIAN
If India needs to import oil to satisfy its domestic needs, the same thing does not apply to refined products: the country has in fact a large refining capacity, and will therefore not be able to absorb large quantities of diesel and Russian gasoline as done with crude oil.
If Moscow, unable to export to Europe, wants to secure an outlet market for its refined products, it will then have to sell them to India at such a low price as to make it convenient for Indian refiners to purchase and re-export them on the European market.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/india-russia-commercio-petrolio-raffinati/ on Thu, 09 Feb 2023 06:11:56 +0000.