The Yuan Challenge: How India-Russia trade gap may threaten Rupee Internationalisation Efforts

In a strategic move to curb its burgeoning oil import bill and reduce dependence on the expensive US dollar, New Delhi aims to bolster bilateral trade with Moscow to $100 billion by 2030.

India-Russia Trade Gap

• However, the dynamics of India-Russia trade have been skewed since the onset of the Ukraine war in 2022.
• Russia has rapidly ascended to become India’s top oil supplier, but Indian exports to Russia have struggled, resulting in a $57 billion trade deficit in the bilateral trade worth $66 billion in FY24.
• While India has managed to save over $10 billion by importing cheaper Russian oil in the last two years and has benefited from exporting petroleum products by processing Urals crude, meager exports to Russia mean that a historic geopolitical opportunity to cut dependence on the expensive US dollar has remained elusive.
• Here is why continued unbalanced trade with Russia could force India to use the Chinese yuan, which runs counter to its efforts toward internationalising the rupee.

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Why is the widening trade gap with Russia benefiting the yuan?

• Unlike India, China has seized the export opportunities emerging in Russia amid crippling Western sanctions and a host of Western companies and banks exiting the war economy.
• Chinese exports to Russia have actually grown faster than imports of Russian oil.
• Chinese customs data shows that shipments to Russia jumped by 47 per cent year-on-year to $111 billion in 2023, while imports grew by 13 per cent to $129 billion.
• The two-way trade crossed a record $240 billion in 2023.
• Since trade between the two countries is more balanced compared to India-Russia trade, it has fostered the use of domestic currency.
• The Russian government has stated that 95 per cent of trade between China and Russia occurs in domestic currency.
• As a result, the yuan is the most sought-after currency in the Russian stock market, even more popular than the powerful US dollar.
• Russian oil exports are therefore requesting payments from Indian refineries in Chinese currency, while the use of the rupee has remained restricted.

How can India internationalise the rupee?

• Even as India aims to reduce its dependence on the US dollar, it does not support the yuan as a currency for settling international trade due to recurrent border tensions with neighboring China.
• In July 2022, the Reserve Bank of India (RBI) issued a circular permitting an additional arrangement for settling trade using the rupee.
• However, the FY23 Economic Survey states that one prerequisite for the emergence of an international currency is that it “needs to be increasingly used for trade invoicing.” 
• According to the BIS Triennial Central Bank Survey 2022, the US dollar is the dominant vehicle currency, accounting for 88 percent of global forex turnover, while the rupee accounts for just 1.6 per cent.
• The survey indicated that if rupee turnover rises to equal the share of non-US, non-Euro currencies in global forex turnover (4 per cent), it will be regarded as an international currency.

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Why are exports to Russia challenging?

• The biggest challenge has been the reluctance of private banks to facilitate trade with Russia due to fears of Western sanctions.
• Most private banks have significant business interests in Western countries and multiple branches that could face sanctions imposed by the European Union (EU) and the US.
• To address this, the joint statement following Prime Minister Narendra Modi’s visit stressed the need to “increase Indian exports to Russia” by strengthening industrial cooperation.
• Indian exporters are also facing difficulties using the rupee settlement mechanism while trading with Russia.
• Exporters initially complained that although the RBI had launched the mechanism, they were unable to use it due to the absence of a Standard Operating Procedure (SOP) for banks.
• Moreover, the ruble and rupee, unlike the yuan, have experienced considerable volatility, complicating trade in domestic currency.

How are Russia and India planning to boost trade?

• During Modi’s visit, both countries decided to eliminate non-tariff and tariff barriers in trade and to initiate negotiations for a trade deal with the Russia-led Eurasian Economic Union (EEU), which could ease the flow of Indian products into the EEU.
• The EEU consists of five member states: Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia, representing a $5 trillion economy.
• According to the joint statement, India and Russia agreed to cooperate in manufacturing sectors such as transport engineering, metallurgy, and chemicals.
• Russia and India have also planned the implementation of joint projects in priority areas and emphasised the importance of expanding reciprocal trade flows of industrial products to increase their share in bilateral trade.
• The statement further reflected discussions on the migration and mobility partnership agreement between the two countries.

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Conclusion

Balancing India-Russia trade is crucial for reducing dependence on the US dollar, internationalising the rupee, and overcoming challenges posed by Western sanctions and yuan dominance.

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