China was eager to introduce the yuan as the reference currency for the rupee-ruble rate. According to Global Times, China’s official media, “India would have considered the Chinese yuan as a reference currency to settle the rupee-ruble trade”. Due to the sharp depreciation of the Russian ruble due to Russia’s invasion of Ukraine, authorities were struggling with a new rupee-ruble rate. The urgency for a new rupee-ruble rate emanated from global sanctions against the import of oil as well as military equipment from Russia. The sanctions do not apply to India’s import of crude oil and military equipment from Russia as they are not exchanged in US dollars. They are traded in Indian rupees.
The Chinese yuan is seen as a cross-border bargain amid sanctions on Russia. Exporters expect the currency to gain more users due to sanctions against Russia. “The yuan appreciated to 6.30/US dollar on March 2, 2022, its highest since April 2018,” according to Nikkei.
Russia would have offered oil at a reduced price. However, giving a discount, the main problem is the Rupee-Ruble rate. The rate is set annually. According to “Livemint”, India and Russia are studying the possibility of using the yuan as a reference currency to settle the rupee-ruble rate. The Chinese yuan is the fourth commercial currency in the world. Furthermore, China is Russia’s largest trading partner vis-à-vis India’s largest trading partner. Given these trade structures, where China is a giant, the Chinese yuan has the potential to intervene in the settlement of the rupee-ruble rate.
Russia has never been a major trading partner of India. It represents 1.2% of India’s world trade, vis-à-vis India, which accounts for nearly 3% of Russia’s world trade. Crude oil is the main product of trade between the two countries. India has a trade deficit with Russia. Payment for exchanges is made in Indian Rupee. Under the rupee payment mechanism, Indian importers pay for goods imported from Russia to Russian bank accounts in India and, in turn, make ruble payments to Russian exporters. Given the low volume of trade, the payment mechanism of rupee-ruble trade does not matter, as the ruble depreciates due to the war in Ukraine.
Nevertheless, the rupee-ruble rate plays an important role since India is the big buyer of Russian arsenal and military equipment. Currently, almost half of India’s defense purchases are made from Russia, according to SIPRI (Stockholm International Peace Research Institute). In these contexts, the rupee-ruble rate assumes importance in India’s balance of payments (BOP).
One of the questions is what currency should the arms and oil trade be conducted in? The Russian ruble has depreciated by more than 30% against the US dollar since the outbreak of the war between Ukraine and Russia. In terms of the Indian rupee, the ruble depreciated by more than 10%. The depreciation of the ruble is expected to worsen further with the uncertainty of the war. These decipher two scenarios of India-Russia trade. First, India will lose its exports to Russia, since Indian products will be more expensive. India’s main export products to Russia are pharmaceuticals, tea and iron, steel, in addition to crude oil and refined products. Second, although India imports more from Russia than it exports, the share of imports is insignificant in total imports. Therefore, the depreciation of the ruble is unlikely to release much gain for India in trade imports.
However, there has been a significant decline in India’s purchases of arsenal and military hardware from Russia. Between 2012 and 2016, about 69% of military equipment and arsenal purchases came from Russia. The share fell to 50% between 2017 and 2019, according to SIPRI.
There was a sharp drop in purchases of naval aircraft and ships. The share of Russian manufacture in the total number of Indian defense aircraft has risen from 81% in 2000 to 67% in 2020, according to a study by the Simson Center – a think tank. For naval vessels, the share fell from 58% to 44% over the same period.
Therefore, even though India’s heavy dependence on military hardware is exerted on Russia, it is on a downward trend. Significant diversifications have been made towards France, the USA and Israel for purchases of military equipment. Given this, the importance of the Rupee-Ruble trade for the purchase of military equipment is declining, even if the Ruble depreciates.
With the Russian-Ukrainian war with no end in sight and Russia continuing to be squeezed out of the US-dollar-denominated Swift network due to sanctions, Russian trade must rely on the yuan-denominated global financial system, according to Shirley Ze Yu, political economist and Fellow of Harvard Kennedy School of Ash Center. The truth is that Russia has reduced its dependence on the US dollar for the past few years and continues to add more yuan to its reserves as it increasingly looks eastward for economic development.
Bank of Russia data shows that while Russia’s holding of yuan has increased significantly from 12.8% to 17.1% as of January 1, 2022, its holding of US dollars has dropped to almost half at 10.9 %, up from 21.1% a year ago, according to Global. Time. These demonstrate that Russia will increase its holdings of yuan and prefer to use the local currency as a benchmark for expanding trade, instead of the US dollar. (API Service)