Currency Quandary in Indo-Russia Trade: The Yuan Challenge

By: Niyati Sareen

The trade relationship between India and Russia continues to evolve amid the shifting geopolitical landscape. Western sections on Russia, along with India’s trade deficit with China, poses a currency challenge, one which complicates the use of Chinese Yuan in international trade.

The ongoing Russo-Ukrainian war is affecting the trade relationship between India and Russia. In a curious turn of circumstances, the war has led to a massive spike in the volume of trade between the two countries. At the same time, however, it has created a huge imbalance in their export and import dynamic resulting in a trade deficit in India’s bilateral trade with Russia.  

Rise in Fuel Trade

Following the invasion of Ukraine in 2022, western countries imposed the most onerous trade and financial sanctions on Russia, including slowly removing their banks from SWIFT (Society for Worldwide Interbank Financial Telecommunications), a global system to facilitate bank transactions across national borders. The aim was to cut off Russia “from the international financial system and harm their ability to operate globally” as reported by BBC. The oil and gas sector majorly contributes to Russia’s export revenue and additional sanctions including a price cap of $60 per barrel and an oil embargo caused the price of crude oil to fall substantially. In order to bust these sanctions, Russia began offering oil at discounted prices to countries willing to buy. Subsequently, it became India’s top oil supplier, with imports shooting up from $5 billion in 2021-2022 to around $38 billion in 2022-23 - a massive increase of 639% since the pre-war period when “Russian oil accounted for only 2% of India’s total oil imports.” Russian oil imports grew by another 40.43% in 2023-24, contributing to 25% of India’s total oil imports for the year.  

 Payment Challenges

Since India has emerged as a global refining hub, it offsets the yawing trade deficits caused by import of Russian oil by re-exporting refined products to other countries in the world and earning hard currency in the bargain. Thus, the imbalance in trade poses less of a challenge compared to finding an appropriate payment mechanism for importing oil from Russia. As India and Russia continue to experience a trade gap, with India’s trade deficit of around $57 billion in bilateral trade for 2023-24, it is difficult to carry out transactions using the Indian Rupee. Furthermore, as interest rates and inflation are soaring in Russia, the Ruble has become a fairly volatile currency. Reuters recently reported that, “Russia’s central bank hiked its key interest rate by 200 basis points to 18%.” Besides that, the fear of Western sanctions by the RBI (Reserve Bank of India) and the growing refusal to deal with the Ruble around the world is making the Russian currency unsuitable for trading purposes.

Enter the Dragon

Russia’s largest stock exchange institute, the Moscow Exchange (MOEX) has also been affected by sanctions imposed both by the US and EU countries, resulting in the suspension of USD and Euro to carry out trade. For this reason, Russia has been exploring other currencies for trading settlements and working closely with Beijing to switch to China’s Border Interbank Payment System (CIPS) as an alternative to SWIFT. Not only is China Russia’s biggest importer of oil but also the balanced trade between the two makes the Chinese Yuan the most appealing currency for Russia to conduct overseas activities. Additionally, being a manufacturing superpower, China’s trade surplus is causing an appreciation of the Yuan thereby strengthening its presence in international payments.  

This poses a significant challenge for India by adding complexities in trading with Russia. China is India’s largest source of imports and as of FY 2023-24, India is running the largest trade deficit of $85 billion with China. This imbalance has led to a limited supply of Yuan within the country along with weakening the Rupee. If India uses it’s hard currency earnings to buy Yuan in order to pay Russia, it will lose out on potential arbitrage. Additionally, if the Yuan becomes increasingly acceptable around the world, it’s possibility to challenge the dominance of the US dollar can strengthen China’s strategic footprint, making it a bigger threat to India than it already is. Thus, the existing geopolitical tension between the two neighbours makes India even more reluctant to use the Chinese Yuan for international trade.