Billions of dollars from the sale of Russian oil are now stuck in the web of Indian banks, posing a significant obstacle to President Vladimir Putin's plan to shift trade away from the US dollar.
Trading in a Dollar-Dominated World
Typically, commodities like oil, gold, and wheat enjoy the privilege of being traded globally in US dollars, the revered world's reserve currency.
The modus operandi changed for Russia when its financial system got cornered by Western sanctions following Putin's aggressive invasion of Ukraine. The stringent sanctions banned Russia from conducting transactions in US dollars, limiting their trading capabilities.
In a bid to sidestep these restrictions, Putin began selling oil to nations such as China and India, accepting payments in their local currencies, namely the yuan and the rupee. While this move has the potential to dent the dominance of the US dollar overseas, it also comes with its own set of challenges.
China, too, has been inching towards reducing the US dollar's stronghold by coaxing Gulf Arab nations into making yuan-denominated oil and gas trades. Some whispers even suggest a possible yuan-centric bilateral agreement brewing.
The Russian Oil Windfall and its Pitfalls
However, Russia's strategic pivot towards India seems to have a chink in its armor. As Russia's oil sales to India surged, making it one of India's prime oil suppliers, a problem mushroomed: the immense profits from these sales have been piling up.
Approximately $1 billion accrues each month as rupee assets in Indian banks. Due to constraints imposed by the Reserve Bank of India, these accumulated funds are out of Russian reach, preventing their transfer and subsequent conversion into rubles.
This detail, noted by Bloomberg and later by Newsweek, is causing a ripple effect on the Russian economy. Furthermore, Russia's association with India isn't just about oil. It's also a major supplier of arms and military equipment to the subcontinent.
Data from Factly pinpoints a stark contrast - while India's imports from Russia between April 2022 and February 2023 scaled a staggering $41.56 billion, its exports to Russia barely touched the $3 billion mark. Mikhail Zadornov, Russia's former finance minister, recently opined in a column for RBC that the inability to bring back those export earnings to India was a central reason behind the ruble's depreciation this past summer.
Seeking New Financial Pathways
In the backdrop of these financial snags, Russia has indicated its intent to explore an alternative payment channel, possibly in tandem with other BRICS nations (Brazil, Russia, India, China, and South Africa). As the plot thickens, the global economic scenario awaits further shifts in trading patterns.
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