India buys more Russian oil—but its rupee-rouble plan isn't working

Mint

11-07-2025

New Delhi: A rupee-settlement mechanism rolled out in 2022 to ease trade with sanction-hit countries has failed to gain traction with India's largest crude supplier—Russia. Indian refiners continue to source Russian crude supplies through traders based in the United Arab Emirates and settle transactions in dirhams.
Most transactions for crude oil supplies are executed via West Asia-based traders rather than through a direct bilateral payment system between Indian and Russian entities, according to two people familiar with the matter, who spoke on the condition of anonymity.
'There was a payment issue, which has been sorted out now. Payments have been happening in AED (UAE dirham) because Indian state-run refiners are primarily buying it from the traders and most of them are UAE-based," said one of the people cited above. 'Also, even if the Russians give their crude oil for sale to a trader, they earmark it for a particular company. This is something specific to them. Also, the discounts on Russian oil have come down."
Ajay Sahai, director general & CEO of the Federation of Indian Export Organisations (FIEO) said, 'While the Rouble is not freely convertible, the Dirham is both freely convertible and directly pegged to the US Dollar, offering greater ease in international transactions."
In the case of oil imports from Russia in rouble, exporters often incur losses due to the need for double currency conversion—from rupee to dollar, and then from dollar to rouble, Sahai said. Transactions in dirham eliminate this additional cost due to its convertibility and stable linkage to the dollar, he said.
"Moreover, Russia has significant financial investments in the UAE, particularly in sovereign bonds and real estate. Settling export payments in Dirham allows them to accumulate a currency that aligns with their investment interests," Sahai said.
India's experience shows it is difficult to make an alternative for the dollar to work because of the complexities of global trade. On top of that, US President Donald Trump has now warned Brics nations of higher tariffs if the bloc seeks an alternative to the dollar.
Spot purchases rule
India currently has no long-term crude oil supply agreement between Russian oil majors such as Rosneft and Indian state-run refiners including Indian Oil Corp. Ltd (IOCL), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL). The bulk of Russian oil is being procured via spot deals through traders.
'In the absence of long-term deals with state-run Indian refiners, spot purchase of oil is largely done via traders in Dubai and the payments are mostly made in AED," the person added.
Russia emerged as India's top crude supplier after the 2022 invasion of Ukraine, as deep discounts spurred demand. Russian oil's share in India's import basket surged from around 2.5% in fiscal year 2021 (FY21) to 36% in FY25. However, the discounts have narrowed—from about $30 per barrel in 2022 to $2.5-4 per barrel now as international oil prices have declined.
Reliance Industries Ltd was the last Indian company to sign a long-term crude deal with Rosneft—a 10-year supply agreement inked in December 2024. Talks of a consortium of Indian state-run refiners resuming negotiations surfaced earlier this year, after fresh sanctions were imposed on some Russian oil producers and vessels in January.
IOCL had in 2023 signed a deal to raise oil imports from Rosneft. In 2021, the company signed a deal to buy up to 2 million tonnes of crude oil from Rosneft by the end of 2022.
In April-May this year, India imported $9.1 billion worth of oil from Russia, down 9.81% from $10.15 billion in the year-earlier period. A G7-led price cap of $60 per barrel remains in place for Russian oil exports to curb Moscow's wartime revenues while protecting energy access for low- and middle-income nations.
Yuan trumps rupee
Experts say another reason the rupee-rouble mechanism hasn't taken off is because Russia has limited use of the Indian currency.
'The Russians want hard currency. If they export more to India than they import, they end up with a pile of rupees that can't be freely exchanged in international markets. That carries a risk of value erosion over time," said India's former commerce secretary Anup Wadhawan.
'Iran had accepted rupee payments in Indian banks earlier when they were under sanctions. But Russia is in a different situation. They aren't willing to accept rupees in large volumes because they're looking for usable currency, not blocked balances in Indian banks," he added.
In FY25, India's total imports from Russia stood at $63.84 billion, of which nearly 78% was oil. Crude oil imports alone rose to $50.28 billion, up 8.16% from $46.48 billion the previous year.
'US sanctions on Russia have made most banks wary of engaging in rupee-rouble transactions. Even trade routed through Russian banks remains limited, primarily due to a significant trade imbalance in Russia's favour," said Bipin Sapra, partner and leader, indirect tax and economic policy, EY India. 'As a result, more widely accepted currencies, such as the AED, are increasingly being used to settle payments."
However, Prashant Vasisht, senior vice president and co-group head, corporate rating,Icra Ltd., said with Russia's larger trade volumes with China, 'there are more use cases for reserves of yuan, which makes the Chinese currency more attractive for non-dollar transactions".
Imports stay strong
Despite the absence of long-term crude supply agreements with Russian majors, Indian imports remain strong. Indian state-run firms, including Indian Oil, have been in talks with Rosneft, but an agreement has yet to materialize.
Asked in an interview withMintwhether talks with Rosneft for a long-term deal had resumed, Indian Oil chairman Arvinder Singh Sahney said: 'In this crude business there is no stoppage or starting of any dialogue or any because we are constantly in touch with all of them. We are in touch with all them and they are in touch with us because it's a constantly evolving business."
India, a key refining hub in Asia, currently operates 23 refineries with an installed capacity of over 258 million tonnes per annum (mtpa) and plans to expand this to 310 mtpa by 2028. Its crude oil and petroleum product imports jumped 29.5% to $209.57 billion in FY25.
Indian firms—ONGC Videsh Ltd, Bharat Petroresources Ltd, IOCL and Oil India Ltd—have invested nearly $16 billion in Russian oil and gas assets, including Sakhalin-1, Vankor, Taas-Yuryakh and the Siberian deposits of Imperial Energy Corp. Plc.
S&P Global Commodity Insights on Thursday said that Russia retained its position as India's top crude supplier in January-June period with shipments of 1.67 million barrels per day, compared to 1.66 million barrels per day a year earlier.
'With a modest level of Russian imports in the early months of 2025, volumes are rising again, supported by lower crude prices that enable higher volumes to be procured below the price cap," said Abhishek Ranjan, South Asia oil research lead at S&P Global Commodity Insights. 'As the global oversupply is expected to continue putting pressure on prices, we expect Russian flows to remain at current levels, if not increase."