India refiners start yuan payments for Russian oil imports

Context

Indian refiners have reportedly started using Chinese yuan to pay for some of their oil imports from Russia. This shift comes as Western sanctions against Moscow and its customers make it necessary to find alternatives to the US dollar for settling payments.

Background

• India has become a top customer of Russia’s crude, alongside China, after the Western sanctions and the price cap on Russian oil.
  • India’s crude oil imports from Russia are estimated to have hit a new record high of 2.2 million barrels per day (bpd) in June, having risen in 10 consecutive months.
• More than a year since the Russian invasion of Ukraine began, India has turned from a marginal buyer of Russian crude to the most important market for Moscow’s oil alongside China.

The changing payment method

• Traditionally, the US dollar has been the dominant currency for global oil transactions, including those made by India.
• The first preference of the Indian refiners is to pay in S. dollars, but if that’s not possible, for example, banks unwilling to settle trades with Russia in dollars, payments in other currencies are being made, such as in UAE dirhams or Chinese yuan.
• The yuan payments for Russian crude oil are part of both Russia and China’s efforts to sidelinethe U.S. dollar as the currency of choice in international trade.

Will India continue to use yuan?

• Unfavourable exchange rate: The refiners are unlikely to use the yuan for multiple cargoes from Russia as higher demand for the currency will make the exchange rate unfavourable.
• Unnecessary promotion of Chinese currency: Selling dollars to buy yuan would also result in India effectively helping China further its currency agenda, potentially a politically unpalatable step.

Is the world moving towards de-dollarisation?

De-dollarisation refers to the replacement of the U.S. dollar by other currencies as the global reserve currency.

• The emergence of parallel currencies in international trade has fuelled the ongoing heated debate over de-Dollarization, with recent events providing additional ammunition to those critical of US dominance.
• Countries are increasingly seeking to reduce their reliance on the US dollar.
  • Examples include China and France’s yuan-settled LNG trade, Russia turning to China’s yuan amid geopolitical tensions, and China and Brazil’s deal to trade in their own currencies.

How would it impact (if becomes reality)?

Positive side	Negative side
exporters and importers to balance risks have more certainty about the revenues and sales diversified risks strengthened national currencies increased monetary policy independence reduced vulnerability to US sanctions	erosion of the US dollar’s dominance emergence of parallel currencies impact on a country’s networking effect and create substantial barriers heavy toll on countries reliant on imported essentials (fuel and food), rendering them exorbitantly expensive transition challenges, potential short-term instability limited global acceptance of alternative currencies