By Nidhi Verma

NEW DELHI (Reuters) – Indian companies are still buying Russian oil in dollars after Mashreq Bank in Dubai refused to process payments from at least two refineries in Emirati dirhams as requested by the supplier, according to three sources familiar with the matter.

Russia has been hit by sanctions from the United States and its allies following its invasion of Ukraine, and Moscow has urged some buyers of its goods to pay in rubles or currencies other than the dollar and euro, in which its contracts are normally denominated.

Traders supplying Russian oil in July had asked at least two Indian companies to settle in dirhams. An invoice from one of the refineries viewed by Reuters showed that oil payments were calculated in dollars, while the payment was requested in dirhams.

The bill showed payments to Gazprombank through Mashreq Bank, its correspondent bank in Dubai. Mashreq has an office in New York, according to its website.

The three sources said the dirham payments did not go through because Mashreq refused to facilitate trade. Reuters couldn’t determine why.

The US Treasury Department, Mashreq Bank and Gazprombank did not immediately respond to requests for comment.

One of the sources said the payments were eventually processed by the Abu Dhabi branch of the State Bank of India and settled in US dollars.

The State Bank of India did not respond to an email from Reuters seeking comment.

The United Arab Emirates and India have avoided harsh criticism of Russia’s actions in Ukraine, which Moscow describes as a “military special operation,” and have not imposed sanctions.

New Mechanism

The Central Bank of India recently set up a mechanism to facilitate international trade in rupees, a move seen as helping business ties with Russia in the event of tougher Western sanctions against Moscow.

The new rules largely mirror the barter-like system used with Iran when it was sanctioned, where Indian importers deposited rupee payments into Tehran’s commercial banks’ “Vostro” account at India’s UCO Bank, a state-owned lender .

A Vostro account is one held by a local correspondent bank on behalf of a foreign bank.

Iran used the funds to pay for imports of unsanctioned goods from India.

UCO Bank has received approval from India’s central bank to open a special rupee account for Russia’s Gazprombank, and its chief executive Soma Sankara Prasad told Reuters it hopes to do so soon.

To settle under the new mechanism, importers and exporters must agree to invoice in rupees and settle exchange rate terms.

To make trading the local currency more attractive, India has also allowed foreign banks to invest excess funds in government securities, as the dedicated rupee accounts offer no interest on deposits.

According to government data, Indian imports from Russia in April-August of this fiscal year totaled US$17.24 billion, up from about US$3.2 billion last year, reflecting a sharp increase in oil purchases.

Western sanctions have prompted many oil importers to avoid Moscow, causing spot prices for Russian crude to hit record discounts versus other grades.

This offered Indian refiners, who rarely bought Russian oil due to high freight costs, an opportunity to snag exports of Brent and Middle Eastern staples at heavy discounts.

(Reporting by Nidhi Verma, additional reporting by Timothy Gardner in Washington, Nupur Anand in Mumbai, Yousef Saba in Dubai; Editing by Mike Collett-White and Kirsten Donovan)

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