IMPACT OF RUSSIAN OIL PRICED IN RUBLES

By BWA Envoy
April 01, 2022
2 Minutes Read

Economic sanctions imposed by the United States, Europe, and their allies have shaken the Russian economy and caused the value of the ruble to fall. Subsequently, Russian president Vladimir Putin came up with a way to help prop up his currency, by demanding countries use rubles to buy Russian oil and gas. The ruble slipped to historic lows after Russia attacked Ukraine on February 24 and then a single US dollar was equivalent to 139 rubles as of March 7, 2022. Now the currency has strengthened and reached about 65.67 rubles as of May 4, 2022, after a series of actions taken by the Central Bank there. The key driver of the ruble gain is the huge demand for Russia’s oil and gas in Europe and other parts of the world.

If Russia prices its oil in rubles then the exchange rates at which EU or UK importers would sell euros or pounds to buy rubles in international forex markets will start to matter: an expensive ruble would be costly for everyone for the importing firms to down to households. Europe’s gas prices surged almost 3 times in March 2022 before coming to their normal price. This could pave the way for the ruble to eventually gain a more prominent position as a reserve or international currency. However, considering the sanctions imposed it is difficult to acquire rubles and make payments in a manner that avoids the sanctions.

Recently Russia has offered India a dual-payment mechanism to allow more trade in local currencies. The latest offer involves payment from Indian oil imports from Russia in dollar or euro while the rest of the trade is to be settled using a ruble-rupee denominated mechanism by using its messaging system SPFS. The latest data shows that India has a trade deficit of $5.5bn with Russia which includes more than $3bn in imports of oil and petroleum products. If India can purchase oil in rubles through SPFS then it can reduce the trade deficit to large extent. India also has the option to look for a floating rate arrangement by buying oil from Russia at a discounted rate to cool inflationary pressures.

Amid the ongoing war in Ukraine, Russia’s gas supplies to China have soared by as much as 60% in the first four months of 2022 compared to the same period last year. Also, Putin has floated the idea of depositing gold with Russia to buy rubles with which oil and gas can be purchased. This is a very powerful and disruptive idea because a large part of the global energy trade could move away from the dollar. So this is a challenge to the status of the US dollar as a world reserve currency in times to come.