Indian refiners are paying for Russian oil with Chinese money

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?

Indian refiners have begun paying for some oil imports from Russia in Chinese yuan, as Western sanctions force Moscow and its customers to find alternatives to the dollar for settling payments. Western punishments over Russia’s invasion of Ukraine have shifted global trade flows for its top export, with India emerging as the largest buyer of seaborne Russian oil even as it casts about for how to pay for it amid shifting sanctions. The US dollar has long been the main global oil currency, including for purchases by India, but now the yuan is playing an increasingly important role in Russia’s financial system because Moscow has been frozen out of the dollar and euro financial networks by international sanctions. China has also shifted to the yuan for most of its energy imports from Russia, which overtook Saudi Arabia to become China’s top crude supplier in the first quarter this year.

Indian Oil Corp, the country’s biggest buyer of Russian crude oil, in June became the first state refiner to pay for some Russian purchases in yuan. At least two of India’s three private refiners are also paying for some Russian imports in yuan. It could not immediately be determined how much Russian oil Indian refiners have bought with yuan, although Indian Oil has paid in yuan for multiple cargoes, sources said. The rise in yuan payments has given a boost to Beijing’s efforts to internationalise its currency, with Chinese banks promoting its use specifically for Russian oil trade. Since the imposition of sanctions on Moscow, Indian refiners have mostly bought Russian crude from Dubai-based traders and Russian oil companies such as Rosneft, the Litasco unit of Russian oil major Lukoil, and Gazprom Neft. Indian refiners have also settled some non-dollar payments for Russian oil in the United Arab Emirates’ dirham.

India’s stance

India had asked banks and traders to avoid using the yuan to pay for Russian imports because of longrunning political differences with China. It was not immediately clear whether recent purchases represent a change in that view. India’s imports from Russia rose to a record in May, with Russian crude oil accounting for 40% of India’s overall oil imports compared with 16.5% a year earlier, denting purchases from Iraq and Saudi Arabia.

Sanctions

While Western sanctions against Moscow are not recognised by India and its purchases of Russian oil may not violate them, Indian banks are wary of clearing payments for such imports. In May, State Bank of India SBI.NS, the country’s top lender and a key banker for state refiners, rejected IOC’s planned payment in dollars for a cargo delivered by Rosneft. In June, IOC used ICICI Bank, a private-sector Indian lender, to settle this trade with Rosneft by paying in yuan to Bank of China. One private refiner has also been using the same mechanism for payments for Russian oil.

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.