Indian Refiners Paying In Yuan For Russian Oil
Context:
As a result of Western sanctions, which require Moscow and its clients to find alternatives to the dollar for payment settlement, Indian refiners have started paying for part of their imports of oil from Russia in Chinese yuan, according to people with direct knowledge of the situation.
What is the background of the situation?
- Since Russia invaded Ukraine, the West has imposed numerous sanctions on that country. Even Nevertheless, there is still a significant market for Russian oil.
- For a very long time, the US dollar has been utilised as payment in international trade.
- However, after the sanctions were placed on Russia, the US dollar was no longer an option, and Russians began looking for alternate forms of payment.
- The Indian Rupee was also contemplated for use in this context, but it was later eliminated.
How much demand is there for the Russian oil?
- Western nations have implemented sanctions against Russia in retaliation for its invasion of Ukraine. The effects of these restrictions on international trade flows have been severe, particularly for Russia’s primary export, oil.
- Despite the restrictions, Indian refiners have become the country’s biggest consumers of Russian oil transported by sea. To maintain their Russian oil imports, they have been aggressively looking for different payment options.
What was the outcome of using Yuan as a payment option?
- Change from the US dollar to the yuan: Historically, India has purchased its oil in US dollars, which has been the major global oil currency. However, Indian refiners have begun paying for some Russian oil imports in the Chinese yuan as a result of Russia’s absence from the dollar and euro financial networks.
- Problems with payment settlement: For Indian refiners, it has become difficult to make payments for Russian oil because of the shifting restrictions. Banks might be hesitant to help refiners transact in dollars, which would cause them to look at alternative currencies like the yuan.
- Yuan payments made by Indian Oil Corporation: The first refiner to make some of its Russian oil purchases in yuan was the Indian Oil Corporation in June. This action reflects a rising trend among Indian refiners to broaden their available payment methods.
- Private refiners also adopting yuan payments: At least two of India’s three private refiners, Reliance Industries Ltd., Nayara Energy (supported by Russia), and HPCL Mittal Energy Ltd., are said to be using yuan payments for some of their Russian oil purchases.
- Support for yuan internationalisation: Beijing’s efforts to encourage yuan internationalisation are aided by the rise in yuan payments for Russian oil imports. In particular, Chinese banks actively promote the use of yuan for Russian oil transactions.
What are other currencies used by India Refiners?
- Use of other currencies: Indian refiners have resolved certain non-dollar payments for Russian oil using the dirham of the United Arab Emirates in addition to yuan payments. This demonstrates how adaptable refiners are when it comes to using multiple currencies.
What could be the negative implications of using the yuan?
- Market access: By using the yuan, Indian refiners may have better market access in China. However, since there have been conflicts between China and India, there are relatively few prospects for access to their markets.
- Risks associated with fluctuating exchange rates: The yuan is a controlled currency, and the Chinese government controls its exchange rate. When making transactions in yuan, this could increase the level of uncertainty and exchange rate risk for Indian refiners. The profitability of these transactions may be impacted by changes in the yuan’s value to the Indian rupee.
- Limited acceptance: Although the yuan has become more widely used worldwide, it is still less broadly accepted than the US dollar. Finding vendors or clients ready to take yuan as a form of payment may be difficult for Indian refiners. The options accessible to Indian refiners may be limited by this restriction, which may also raise transaction costs.
- Political implications: Considering the continuing geopolitical tensions between China and India, switching from the US currency to the yuan may have political ramifications. It might be interpreted as a step towards greater alignment with China and could have an impact on relations with the US and other nations that have historically utilised the US dollar as the primary global reserve currency.
