Russia Quietly Starts to Shift Its Oil Trade Into Rubles

Published: February 27, 2008

MOSCOW - Americans surely found little to celebrate when the price of oil settled above $100 a barrel last week.

They could, though, be thankful that oil is still priced in dollars, making the milestone of triple-digit oil prices noteworthy at all.

Russia, the world's second-largest oil-exporting nation after Saudi Arabia, has been quietly preparing to switch trading in Russian Ural Blend oil, the country's primary export, to the ruble from the dollar. Industry analysts and officials, however, say that this change, if it comes, is still some time off.

The Russian effort began modestly this month, with trading in refined products for the domestic market.

Still, the effort to squeeze the dollar out of Russian oil sales is yet another project notable for swagger and ambition by the Kremlin, which has already wielded its energy wealth to assert influence in Eastern Europe and former Soviet states.

"They are serious,"Ě said Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow. "This is something they are giving priority to."Ě

Oil trading is nearly always denominated in dollars. When Middle Eastern oil is sold to Asia, for example, the price is set in dollars.

Similarly, Russia's large trade with Western Europe and the former Soviet states in crude oil and natural gas is conducted in dollar-denominated contracts. Gazprom, the natural gas monopoly, set the price of gas in Ukraine at $179 per 1,000 cubic meters in 2008, for example. There are no proposals yet to switch gas pricing away from dollars.

As a result, companies and countries that buy petroleum products are encouraged to hold dollar reserves to pay for their supplies, coincidentally helping the American economy support its trade deficit.

Russia would like to change this practice, at least among its customers, as a means of elevating the importance of the ruble, a new source of national pride after gaining 30 percent against the dollar during the current oil boom.

In a speech on economic policy this month, Dmitri A. Medvedev, a deputy prime minister and the likely successor to President Vladimir V. Putin in elections on March 2, said Russia should seize opportunities created by the weak dollar.

"Today, the global economy is going through uneasy times," Mr. Medvedev said. "The role of the key reserve currencies is under review. And we must take advantage of it."He asserted that "the ruble will de facto become one of the regional reserve currencies."

Other oil-exporting countries are also chafing at dealing in the weakening dollar.

Since 2005, Iran, the world‚€™s fourth-largest oil exporter, has tried to open a commodity exchange to trade oil in currencies other than the dollar. The Iranian ambassador to Russia said Iran might choose rubles to free his country from ‚€œdollar slavery.‚€Ě

To be sure, some economists have dismissed the project as improbable, given the exotic nature of a security ‚€” oil futures contracts denominated in rubles ‚€” that would blend currency risk with the dollar-based global oil market.

Ruble-denominated futures contracts for Ural Blend, the main Russian grade, would be attractive only if the dollar continues to depreciate, said Vitaly Y. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates.

‚€œThere is a big distance between the desire to trade commodities for rubles and the ability to do so,‚€Ě he said.

All this has not stopped the Kremlin from trying.

In a sign of the government‚€™s seriousness, a new glass-and-marble high-rise home for a ruble-denominated commodity exchange is rising this spring in a prestigious district in St. Petersburg, Russia‚€™s second-largest city after Moscow. The exchange will occupy three floors of the 16-story tower on Vasilievsky Island, one of the islands that make up the historic city center.

The director of the St. Petersburg exchange, Viktor V. Nikolayev, said that the intention was to move slowly and gain market acceptance; the government will not strong-arm sellers or buyers onto the exchange, even in an industry dominated by the state.

Web-based trading for refined products like gasoline or diesel is being introduced in three phases for domestic customers, beginning with government buyers like the Russian navy or municipal bus companies. Private brokers will be allowed to trade in March; futures contracts will be introduced in April.

Mr. Nikolayev said no timeline had been established for trading for export on the exchange, which also handles grain, sugar, mineral fertilizer, cement and esoteric financial products like Russian government beef and pork import quotas ‚€” all in rubles.

‚€œWe are in Russia, and the currency is rubles, not euros, not dollars,‚€Ě he said. ‚€œWe don‚€™t want to depend on the rise or fall of the dollar.‚€Ě

‚€œWe will trade in rubles, to strengthen the ruble,‚€Ě he said.