Abhijit Bhattacharyya | Why allow yuan payments for import of Russian oil?

The “globalised village economy” has suddenly cast a magical spell over the vast Eurasian landmass. In a surprising move, Indian companies have begun to pay for the import of Russian crude oil not in the dollar, as was traditionally the practice, nor even in the rupee or the rouble, but the Chinese currency, the yuan. At a time when there is considerable friction in relations between New Delhi and Beijing, the reasons for this move are hard to fathom.

After the considerable military, political and diplomatic turbulence, particularly in the last three years, the Indian policy transformation was unexpected. Has New Delhi forgotten, or consciously decided to ignore, the switchover from the dollar to the yuan for the sake of the “bigger picture” and long-term national interest -- despite the uncivilised and aggressive behaviour by the overlords of the Communist Party of China on trade, terror, territory, telecommunications, fake tourism and the People’s Liberation Army’s penetration into Ladakh, Galwan, Tawang and Arunachal over last four years?

Let the facts speak. In March 2023 came the first sign of India’s discomfort when the government reportedly issued an advisory to banks, merchants and traders dealing with crude oil imported from Russia, to avoid making any payments in the Chinese currency, the yuan. India had obvious and valid reasons to do so as paying for Russia-India bilateral transactions in a third-party currency would in this case only help the yuan get broader and wider acceptance, and spur smaller and weaker economies to emulate India. The logic and reason of the small and weak economies taking a cue from India’s action certainly couldn’t have been faulted. If India, the fifth-largest economy in the world, allows its key adversary’s currency to be used for payments of imported crude oil from Russia, how could the smaller nations avoid doing it?

Many of these countries are anyway under the thumb of the CPC, having signed on to its Belt and Road Initiative. Despite the government’s advisory to avoid yuan payments, however, several private Indian companies, merchants and traders and at least one state-owned petroleum company ignored it, and committed a monumental blunder by started paying in Chinese yuan for imported Russian crude. Here, the insensitivity of Russia too deserves criticism, and it certainly cannot be ignored. Moscow’s rigid reluctance to accept Indian rupees for a bilateral India-Russia commercial transaction of crude oil is a highly disappointing move. This was totally not expected of a long-standing friend, whose “special relationship” goes back over 50 years, to the days of the now-defunct Soviet Union. If the Indian establishment now loses confidence on Russia’s dependability, due mainly to Moscow’s insistence on yuan payments, it cannot really be faulted.

Russia’s turnaround in this matter shows how power equations in Asia’s heartland have adversely affected New Delhi, albeit slowly and hopefully temporarily. From 1950s to the 1970s and beyond, Moscow helped to create for a pleading Beijing all kinds of military gear — from fighter jets to warships to defence infrastructure. Now it’s just the other way around, which shows the utter helplessness of once-mighty Moscow before its onetime protégé.

Whatever the economics, political compulsions or the lack of options for India, a much deeper look is needed to calculate the basic mathematical monetary loss or profit for New Delhi, which is unlikely to be easy, and may even turn unpleasant in future. Today, one US dollar is a little over Rs 82, though the rate is constantly fluctuating. One dollar fetches a little over 7 yuan. And one yuan converts to around Rs 11.50. So, under what formula should an Indian company, merchant, trader and state- owned oil PSU pay for the imported Russian crude in Chinese yuan? Should the exchange rate be calculated on a US-India, US-China or China-India conversion rate and ratio?

Assuming that Russian crude oil is $70 per barrel, Delhi will have to pay Rs 5,740 ($70 x Rs 82) per barrel to the seller-exporter in Moscow. If India were to pay in Chinese currency, the Indian importer companies will have to pay 490 yuan per barrel ($70 x 7 yuan). However, how much will be the difference between the US dollar and Chinese yuan if Russia insists on a rupee-dollar rate payment to make it Rs 5,740 per barrel, and then convert it for payment in Chinese yuan?

It’s a bilateral diplomatic complication, and impregnated with difference, doubt and dispute. But the facts are clear for India’s importer/importing private refiners of Russian crude. The cheaper import bill due to yuan payments will considerably enhance Indian companies’ profit percentage when the same Russian imported petroleum products, refined by Delhi, are sent to the West by same Indian importers overnight turning into exporters!

By paying in Chinese yuan, India may save its dollar reserves, but the imported Russian crude oil turns into a big bonanza for private company importer-turned-exporters. In the process India falls prey to Dragon’s designs to render Delhi weaker and feebler on the currency front.

In this scenario, India certainly could face some disorder and dislocation. India thus far has been importing crude oil mostly from the Middle East, Nigeria and non-Russian sources, and the quantum of crude oil imports from Moscow was negligible. But the West’s penchant for punishing its adversary through stringent sanctions of all kinds put Moscow on the backfoot owing to its restricted and shrinking European oil-import customer base. As Russian oil prices plummeted due to the glut and lost markets, India emerged as major buyer of “cheaper” oil, thus getting a chance to curb its import bill and save the outflow of foreign exchange (US dollars). It was thus a sudden “win-win” for both Moscow and New Delhi. Indian refineries, both state-owned and private, enjoyed windfall profits.

Nevertheless, India’s yuan payment for Moscow’s oil is a huge blow and an implicit admission of unpredictability of a weak Indian rupee.

That’s not a good omen. The Indian rupee should have got recognition and wider confidence from market players to be accepted, at least by Russia for bilateral transactions and its neighbourhood. Last weekend’s agreement between India and the UAE on rupee-dirham trade may be the way to go!

Yet the question remains: have the yuan payments affected India-Russia ties? No, not yet. But it’s a sign of our times, where a beleaguered Russia’s forced to embrace the yuan rather than the Indian rupee when dollar transactions are ruled out for political and other reasons. Consequently, there’s a question mark on New Delhi’s relevance in Moscow’s eyes, at least in the short term, till the whole question of a bilateral rupee payments in international trade is sorted out.