According to reports, several Russian vessels carrying crude oil to India are now headed eastward from the country owing to payment woes.
The lack of consensus regarding the mode of payment has led to increased oil imports from the Middle East.
Russian Oil Cargoes Moving Away from India
According to vessel-tracking data, five ships — the NS Commander, Sakhalin Island, Krymsk, Nellis, and Liteyny Prospect — all carrying Sokol oil from Russia’s Far East, are approaching the Malacca Strait at a speed of seven to ten knots.
Meanwhile, a sixth ship, NS Century, which is also holding Sokol, is still near Sri Lanka.
Russia was supposed to supply Sokol cargoes to the Indian Oil Corporation (IOC), but they kept floating around India due to payment issues.
Reports show that these vessels are now headed away from India, and China seems to have stepped in to save the idling Sokol cargoes.
Russia as India’s Top Supplier; Shift to Saudi
Crude shipments to India are Russia’s major outlet for exports amid the Ukraine War, with European buyers turning away since the conflict began.
Russia overtook Saudi Arabia and Iraq to become India’s biggest supplier of commodities.
A number of vessels hauling crude from Russia that had been idling off India are now headed away from the country eastwards, amid concerns over oil payments to Moscow https://t.co/oGzW7yUohx
— Bloomberg Markets (@markets) January 2, 2024
However, the last month saw the plummeting of Indian imports from Russia by 16%-22%, the lowest in 2023.
The issue has emerged as a result of payment-related problems because the parties involved could not agree on the currency of exchange.
According to data intelligence provider Kpler, local refiners in India did not receive a single Sokol cargo in December.
The payment issues are forcing India’s biggest refiner, IOC, to draw from its inventories and buy more oil from the Middle East.
Payment Dilemma
The payment issue is complicated due to several sanctions imposed by the US and its allies on entities that are thought to have violated the $60 per barrel cap on Russian oil exports, which went into force in late 2022.
Indian state refiners have settled their oil trade with Russia in the UAE dirham, the US dollar, and a small amount of rupees in case the oil prices are beyond the $60 a barrel cap.
While Russian oil suppliers encourage the use of yuan for payments, the Indian government has discouraged Indian state-owned refineries from using the Chinese currency due to strained ties.
The state-owned refiners that began using yuan earlier have now withdrawn, while private refiners continue to pay in yuan since they have no other option.
The settlement in yuan is also deemed more expensive than settling in dirham for Indians.
The IOC’s payments have also been hampered as Sakhalin-1 LLC was unable to open an account with a bank in the UAE to accept dirham payments.
Additionally, India and Russia have been unable to agree on the usage of rupees for oil payments as the currency remains unused in Russia owing to a trade imbalance whereby Russia exports a lot more to India than it imports from the country.
High conversion costs and fluctuation risks have also made it difficult to find alternatives to the dollar.