India is reluctant to allow state-controlled refiners to pay for Russian oil imports with Chinese currency, known as the Yuan, according to media reports. This is due to concerns about the geopolitical implications of using the Yuan, as well as the fact that it is more expensive for Indian refiners to settle payments in Yuan.
India has become the top importer of Russian seaborne oil this year, with refiners snapping up the crude sold at a discount after some western nations suspended imports from Moscow over its invasion of Ukraine. However, refiners often face problems in settling oil trade with Moscow after the United States and European Union imposed a price cap of $60 a barrel on Russian oil, forcing buyers to use alternatives such as Emirati dirhams for cargoes that have gone above the cap as oil prices have risen.
In July, Reuters reported that Indian refiners began using Yuan to pay for some oil from Russian sellers, while continuing to use dollars and dirhams to settle most of their Russian oil purchases. However, the Indian government has become uncomfortable with using Yuan for settlement, two finance ministry officials told Reuters.
The Indian government is concerned about the geopolitical implications of using the Yuan to pay for Russian oil. China is India's main rival in Asia, and the two countries have been locked in a border dispute for decades. In 2020, there was a deadly clash between Indian and Chinese soldiers on the disputed border.
The Indian government is also wary of increasing its reliance on China. China is already India's largest trading partner, and India has a large trade deficit with China. The Indian government is concerned that increasing its use of the Yuan could make India more vulnerable to Chinese economic pressure.
It is also more expensive for Indian refiners to settle payments in Yuan. Rupees first need to be converted to Hong Kong dollars and then Yuan, a process that costs 2-3% more than settling in dirham.
India's reluctance to allow state-controlled refiners to pay for Russian oil in Yuan could have implications for the India-Russia oil trade. Russian sellers may be less willing to sell oil to India if they cannot be paid in Yuan. This could lead to higher oil prices for Indian consumers.
US-China Rivalry and Rupee as an International Currency
The Indian government's reluctance to allow state-controlled refiners to pay for Russian oil in Yuan also comes at a time when the US and China are engaged in a strategic rivalry. The US has been trying to persuade its allies to reduce their economic dependence on China.
It is also worth noting that India has been trying to promote the use of its own currency, the rupee, for international trade. In July 2022, the Reserve Bank of India (RBI) announced a mechanism to settle foreign trade in rupees. This mechanism is designed to reduce India's reliance on the US dollar and other foreign currencies.
India is in a precarious position where it does not want to let go of the discounted Russian oil while also maintaining distance with China. The best solution seems to be the one in which India gets to trade with the Indian Rupee. This is what the Government of India is promoting for the past one year. But Russia doesn’t seem too keen on this proposition as the bilateral trade balance is tilted in Moscow’s favor.
Various experts on the subject suggest that the Indian Rupee will have to grow into a strong position in the coming years and emerge as an international currency in South-East Asia, then Moscow may reconsider their stance.