It looks like that the economic sanctions imposed by the G7 and other European Union (EU) countries against Russia in the wake of the war in Ukraine turns out to be counter-productive. This is to be seen in the oil exports of Russia and the payments being made in non-dollar denominations by countries like India and China.

Reports suggest that India has replaced EU as the highest importer of Russian oil and gas and so far India has been making the payments in roubles. With the US sanctioning the Russian bank MTS, Indian oil traders are hopeful that the Indian government would find a way out, and prevent the disruption of oil flows and its payments. Indian banks have branches in Russia and the payments are being made directly.

Russia is also likely to establish a direct yuan-rouble exchange system for China to pay for Russian oil imports. India and China are key players in the global oil trade because the countries are the largest importers of oil, and since the war broke out in Ukraine, India has emerged the largest importer from Russia though India imports much more from Iraq and Saudi Arabia.

It has been recognised that the non-dollar payments to Russian oil exports, though running into millions of dollars, as yet constitutes a small portion of dollar payments global oil trade, and dollar still remains the dominant currency for global trade in general. But there is speculation that Western sanctions against Russia did not choke Russian oil exports is seen as an indicator that in a future development, many countries could choose currencies other than dollar to make payments. This may not displace dollar, but it does open up alternate payment systems.  

A US Treasury official quoted Treasury Secretary Janet Yellen as saying, “I don’t think that dollar has any serious competition, and is not likely to for a long time. But there is no doubt that there has been a dent in dollar dominance. International Monetary Fund Deputy Managing Director Gita Gopinath had predicted last year: “The dollar would remain the major global currency…but fragmentation at a smaller level is certainly quite possible.” And this is exactly what is happening in the oil trade.

While the war on the ground has become fierce and inconclusive as Ukrainians fight doggedly and the Russian military might does not assure victory for Moscow, the economic battle through Western sanctions is not working well enough for the West.

And that is adding to the frustration of the Ukrainians, the Americans and the Europeans. Russia is paying a price for its war in Ukraine, but it has managed to buy other buyers for its oil exports, which is a major foreign exchange earner for Moscow. Meanwhile, changes in terms of how international trade payments are to be made is shifting away from the dollar, in however small a fashion.

The spill-over effects of the war in Ukraine are spreading beyond Europe, but the difference is that the Asian countries, especially large economies like India and China which are dependent huge oil imports to sustain their economic growth, have found a way to find ways to work outside the dollar-trade system. It might be too early to speculate whether this is a new trend that is emerging and whether dollar, which had dominated the world trade since the Second World War, is at last losing its pole position.

But with the EU economic growth rate slowing down, partly due to the war in Ukraine, and the US fighting its own economic woes, it is the Asian economies that will become leaders, and they may have a say in deciding the dominant global currency.