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Yuan Payments for Russian Crude Oil Imports: Economics Outweighs Politics

Reports of some Indian refiners paying for Russian crude oil imports using the Chinese Yuan may have triggered concern, but meeting immediate economic needs to secure cheaper petroleum imports outweighs political pressures for now, experts believe. 

Since India has a trade deficit with Russia and a Rupee-based settlement mechanism is yet to be worked out for Russian oil imports despite persistent efforts over the past year, the use of the Chinese currency is being seen as a credible, if temporary, measure.

Narendra Taneja, a leading energy expert, noted that it is unlikely that the Indian government has anything to do with this. “My sense is that this is just a one-off or temporary move until more mutually agreeable payment mechanisms are worked out between Russia and India. I don’t see this (reported payment in Yuan) turning into a template or regular thing. Perhaps some Russian oil exporters needed money urgently and, hence, the payment was made in Yuan at the banking levels,” he said.

Efforts are still on to work out a Rupee-Rouble payment mechanism specific to oil imports, Taneja said. That was not a priority in the past, as India traditionally imported little crude oil from Russia owing to the high logistics costs.

However, the high discounts offered by Russia after its invasion of Ukraine and resultant sanctions imposed by the Western world, have made it attractive for import-dependent large oil consumers like India, especially amid soaring global crude prices through 2022. According to industry estimates, Russia now accounts for 40–50% of India’s crude oil imports, from just about 2% before the conflict began.

Apart from the Rupee-Rouble mechanism, alternatives to the US Dollar are being explored to pay for these purchases. These include the Dirham, the United Arab Emirates’ currency. What makes the currency attractive is that it is backed by the US Dollar and a number of Russian importers have offices in the UAE, industry sources said.

Experts also note that the use of Yuan as an international currency may not be viable in the long term. “There is a huge risk in using Yuan as an international currency as it is heavily controlled by the Chinese government. But the world will move towards diversification of currency for international trade and may not only depend on the US Dollar in the days to come,” said Madan Sabnavis, chief economist of the Bank of Baroda.

India could use the Yuan from its trade with China to pay for Russian oil imports as it is a good option for now, he pointed out.

The Yuan payments to Russia have also attracted Opposition jibes, especially as political relations with China remain cold over border tensions. Senior Congress leader Jairam Ramesh said it was “puzzling” that the Union government has been assisting its Chinese counterpart in this effort by settling oil transactions with Russia in Yuan at a time when India and China are locked in a military confrontation and Chinese troops are still blocking access to critical areas along the Line of Actual Control.

“This [comes] on top of record imports of $98 billion from China and a record trade deficit of $83 billion. The answer to Russia’s reluctance to absorb huge rupee balances cannot be to aid Chinese hegemony,” Ramesh said in a recent tweet. 

Sabnavis, however, emphasised that business and trade relations between India and China continue despite political tensions. 

Meanwhile, India is also trying to internationalise the Rupee. Towards this end, an Inter Departmental Group of the Reserve Bank of India has recommended a road map in a recent report. The process, however, would take time and depend on how many of the group’s recommendations are accepted.

Source : Business Today