Russia has offered India to buy oil at a very cheap rate. Actually, Russia is a very old friend of India. India has also kept its stand neutral in the Ukraine-Russia Crisis. India can reduce its import bill by buying cheaper oil from Russia. This means a lot to India at a time when the price of crude is $100 a barrel. On the other hand, Russia also needs money to support its economy. The question is, what route can India take to buy oil from Russia?
Most of the global trade is done in dollars.
Today most trade in the world is done in dollars. You can gauge the importance of the dollar from the fact that India buys only 5 per cent of its oil from the US, but pays for 85 per cent of its oil in dollars. This means that all transactions in dollars are done through a bank in the US.
India wants to make payment in Rupee
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After the US sanctions on Russia, it is not possible to pay the price of oil to Russia in dollars. In such a situation, India is looking for ways to deal in Rupee-Ruble. This means that India wants to use the rupee to buy oil from Russia. It sounds simple, but it has many practical difficulties.
What will be the mode of payment?
For Rupee-Ruble trade, India has to open an account in a Russian bank. Similarly, a Russian bank has to open an account in India. India will have to keep enough ruble in its account in Russia. Russia will do the same thing in India. Basically it’s like the business model of the 1950s. For many years the Soviet Union and India used this model for mutual trade.
What is the problem in paying in Rupee?
Now let’s know about the problem of this model. Today most trade is done in dollars. The value of each currency is measured in dollars. We generally say that the rupee has weakened against the dollar. The ruble has strengthened against the dollar. Actually, the currency of many countries of the world is not directly related to each other. Guess what we have to do if we want to calculate the value of rupee against the currency of 190 countries of the world? It would be very difficult to do so. Dollar solves this problem.
Actually, the real difficulty is determining the exchange rate. For example, how much money do we have to spend to get one ruble? If we want to buy oil from Russia, then we have to solve this problem. This has become especially difficult when the ruble has fallen by 30 per cent against the dollar.
The second problem is that of trend imbalance. If India imports more oil than Russia, then Russia will have a lot of money stashed away. What will he do with this money? Because rupee is not used in international trade. For example, if Russia wants to buy machinery from China, then China will not take payment in rupees. Russia’s accumulation of too much money is one of the reasons that led to the failure of the 1950s business model.
Fear of America’s displeasure
Lastly, there is also the fear of violating US sanctions by buying India’s oil from Russia. Even if Russia agrees to a deal in ruble and rupee, then America can make a mark for India. So right now India and Russia are trying to find a way out for oil deal. It may take some time.
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