Why is Russia asking India to pay for oil in yuan? How is New Delhi pushing back?

Russia is asking India to pay for its oil in yuan – and New Delhi is pushing back. Reuters quoted people in the know as saying that the Centre’s ‘discomfort’ over letting state-controlled refiners pay for Russian oil imports with Chinese currency has held up the payment for at least seven cargoes. However, the disagreement has not yet impacted deliveries to India – which is Russia’s top importer seaborne oil – as state refiners search for alternative ways of making payment. Let’s take a closer look: What happened? After Russia invaded Ukraine, some Western nations suspended importing oil from Moscow. However, India, with its huge demand for crude, has continued to purchase oil – at a discount.

However, the problem is that United States and European Union have also levied a price cap of $60 per barrel on Russian oil.

This has forced refiners, as prices have surged in the wake of the Ukraine’s invasion, to use alternatives such as  Emirati dirhams. Indian refiners in July began using yuan to pay for some oil from Russian sellers, while continuing to use dollars and dirhams to settle most of their Russian oil purchases. Based on comments from officials at affected refiners, payment for at least seven cargoes is still pending. Some payments for recent cargoes delivered to at least two state refiners have been pending since the last week of September. Indian refiners buy most of their Russian oil from traders, while making some direct purchases from Russian entities. Refining sources said traders have been ready to strike deals in dirhams, but Russian sellers have held out for yuan. [caption id=“attachment_12512582” align=“alignnone” width=“640”] Chinese Yuan and US dollar banknotes are seen in this illustration taken 10 March, 2023. Reuters File[/caption] Rosneft, Gazprom and Gazprom Neft did not reply to requests for comment. State-run Indian Oil Corp, the country’s top refiner, previously used yuan and other currencies to pay for Russian oil. Other state refiners Bharat Petroleum Corp  and Hindustan Petroleum which to date have not paid for oil in yuan, have also been asked by Russian suppliers to pay using Chinese currency, sources said. Why is Russia doing this? While Indian state refiners would prefer to use rupees to pay for Russian oil after the country’s central bank last year announced a mechanism to settle foreign trade in rupees, Russia is less keen to accept rupees given as the bilateral trade balance is tilted in Moscow’s favour. A piece in Bloomberg noted that Moscow was sitting on rupees worth billions of dollars but struggling to put that money to use.

“The rupee isn’t a fully convertible currency internationally, making it difficult to use in global trade,” the piece noted.

Russia also has other reasons to want payment in yuan. The Wire quoted a European Bank for Reconstruction and Development (EBRD) study as saying that the share of Russia’s imports invoiced in Chinese yuan increased to 20 per cent in 2022 from just three per cent in 2021. This came after Russia ‘strategically switched’ to the uuan after it was sanctioned by the US and the EU. The Bloomberg piece noted how Russia’s hunger for yuan has increased sharply as its economy becomes more reliant on China. “Russian businesses have been settling more of their trade in yuan, with the Chinese currency this year and replacing the dollar as the most traded currency in Russia,” the piece noted.  Why is India pushing back? The Indian government, however, has become uncomfortable with using yuan for settlement, two finance ministry officials told Reuters.  It is unclear whether the government actually instructed state refiners to stop paying in yuan, but New Delhi’s disapproval is plain. “It is not banned and if a private firm has yuan to settle its trade, the government will not stop it, but it will neither encourage nor facilitate such trade,” said a ministry official. A piece in Bloomberg argued that promoting the yuan over the rupee would hinder New Delhi’s attempts to internationalize its currency. It also argued that the Modi government doing so would, ahead of the 2024 polls, face criticism for doing so. “India was the only nation in the BRICS bloc — comprising Brazil, Russia, India, China and South Africa — which opposed the introduction of a common currency, fearing it would eventually favour the yuan,” the piece noted. Some people see using the yuan as benefitting China, when ties between the two neighbours remain strained after a border clash in 2020 in which 20 Indian soldiers and four Chinese troops were killed.

Settling with Russia in yuan also increases the cost.

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Two refining sources said settlement in yuan increases their costs, as rupees first need to be converted to Hong Kong dollars and then yuan, a process that costs 2-3 per cent more than settling in dirham. “The rupee to yuan conversion adds an extra extra layer,” the refining source cited above said. Indian Oil, BPCL and HPCL and the country’s oil and finance ministries did not immediately respond to Reuters’ requests for comments. Private Indian refiners have continued to pay in yuan and other currencies for Russian oil imports, sources said, with most Indian purchases of Russian oil paid in dirham. With inputs from agencies