Payment in Chinese currency to buy oil from Russia
Most of the business around the world is done in the US currency dollar. When the Russia-Ukraine war started in February 2022, many types of sanctions were imposed on Russia. After which Russia could not transact with any country in US dollars.
When Russia offered to buy oil cheaply, India immediately agreed. The icing on the cake is that Russia agreed to accept the payment in rupees. But now news is coming that Indian companies are using Chinese currency Yuan, not dollar or rupee, to buy oil from Russia.
Bhaskar will learn in the explainer why India is forced to pay in Chinese currency to buy oil from Russia, how China is taking advantage of it?
Where did the talk of paying in yuan to buy oil from Russia come from?
News agency Reuters wrote in its exclusive report published on July 3 that from June 2023, Indian oil companies have started paying in Chinese currency yuan to buy oil from Russia.
Two of India’s three largest private refiner companies have now started making payments in yuan. However, there is no information in the report that how much oil India has bought from Russia through Yuan currency.
In the report, an Indian government official said that the refiners first want to pay in dollars, but if the sellers do not agree, then they have to pay in UAE’s currency dirham or Chinese currency yuan.
Which compulsions of India is China taking advantage of?
Last year, the Reserve Bank of India allowed Russian banks to open Vostro accounts in India. Big banks of India and Russia opened Vostro accounts in each other’s countries. So that the currency of both the countries can be traded in Rupee and Ruble. After some time, transactions in rupees were refused. There are 3 reasons for this…
- Due to India’s trade deficit, Russia has a pile of Indian currency There is a huge difference in imports and exports between India and Russia. In the financial year 2022-23, India imported goods worth Rs 3.82 lakh crore from Russia. At the same time, Russia has bought goods worth Rs 25,000 crore from India during this period. This means that India has a trade deficit with Russia. Due to this, Russian banks got a pile of Indian rupees. Last year about 32 thousand crore rupees Indian currency was lying with Russia.
- Difficult to convert rupee to other currency
Few countries in the world transact in Indian rupees. In the last 16 months, a lot of money has been deposited with Russian banks. Converting rupees to other currency is difficult. Also, by paying money, you cannot even order goods from most of the countries. Russia can do business only with India with this money. That’s why Russia stopped the transaction in rupees. In addition, the Russian currency has been fluctuating continuously since the ruble war. The value of the Russian currency is not stable. In such a situation, India also wants to avoid doing transactions in this currency to buy oil. - Restrictions on Transactions in US Dollars and Euros
The US and the European Union have excluded Russia from the International Transaction Network SWIFT. This means that Russia can no longer transact in dollars and euros. That is, if India wants to pay in dollars instead of buying oil from Russia, then it is not possible. Because Russia has been excluded from the American payment network system. After the closure of these three routes, India has an easy option of payment for Russian oil in Chinese currency Yuan only, which India has to use despite not wanting to. China is benefiting from this.
If India pays in Yuan, then what is the benefit to China from this?
America has created SWIFT system for doing business and payment around the world. The SWIFT network currently includes 11,000 banks in more than 200 countries. Who keep their foreign exchange reserves in US banks. Similar to SWIFT, China’s Central Bank People’s Bank of China has created a system called CIPS. About 1300 banks from 103 countries have been linked to this payment system. Last year, more than 80 trillion yuan (China’s currency) was transacted through this system. In January 2022, the yuan became the fourth most transacted currency in the world. Beyond that were only the US dollar, the euro and the British pound.
China has currency swap agreements with more than 40 countries to boost yuan reserves. Under this agreement, there is no need for SWIFT system every time 2 countries do business. Those countries can trade a fixed amount in their own currency.
Apart from this, there is also talk of paying for oil in Chinese currency from Saudi Arabia. That is, the countries which currently keep dollar reserve to buy oil, will keep reserve in yuan. This will reduce the dominance of the dollar and this is what China wants.
Transactions in Chinese currency will shock the Indian rupee
India wants the international recognition of its currency rupee to increase. RBI has also made some efforts for this in the past…
- RBI has demanded the IMF to include the Indian rupee in the SDR i.e. Special Drawing Rights. SDR is a reserve asset of the IMF. This includes 5 currencies so far (US Dollar, EU currency Euro, Chinese Yuan, Japanese Yen and British Pound).
- To increase the use of rupee in cross-border business transactions, the Reserve Bank has started promoting Real Time Gross Settlement (RTGS).To increase the use of rupee in cross-border business transactions, the Reserve Bank has started promoting Real Time Gross Settlement (RTGS).
- Indian banks have started opening Vostro accounts in other countries. Through this, it is easy to make payments in rupees to the company of other countries or to the people there.
- India has authorized SBI to deal in rupees with Russia. On September 7, the Reserve Bank and the Finance Ministry had asked the bank to promote import and export transactions in rupees. Officials believed that this would strengthen the rupee.
Payment in Yuan for Russian oil is definitely a setback in the direction of internationalizing the Indian currency.
Way Ahead…
If the global acceptance of the Indian rupee has to be increased, then India will have to increase its exports. Suppose if India starts exporting more to Russia, then its consumption of rupee will increase and it will start taking payment in rupees. Although this is a process of many years.
Experts believe that China’s efforts to reduce the dominance of the dollar are causing damage, but it will take a long time to make a big impact. Russia and China are needed along with other countries in this campaign against the dollar.
However, experts do not find the yuan a suitable replacement for the dollar. The biggest reason for this is the Chinese government. There is no democracy here, due to which there is no transparency in the institution. No country would want to keep such a currency as reserve, which is at high risk of sinking.
