The Chinese official media Global Times was optimistic to introduce the Chinese yuan as the reference currency for the rate rupee-ruble. Due to a sharp depreciation of the Russian ruble due to the invasion of Ukraine by Russia, the authorities were faced with a new rate rupee-ruble. The urgency of a new rate rupee-ruble emanated global sanctions against the import of petroleum and military equipment from Russia. The sanctions do not apply to imports by India of commercial property, including crude oil and military hardware from Russia because they are not denominated in US dollars, but in Indian rupees.
Russia had offered discounted oil, which exclude transportation and insurance costs. Russian crude is more expensive than that of the Middle East due to higher freight costs. However, providing discounted oil, the main problem is the rate rupee-ruble. The rate is set annually. According to “Livemint” India and Russia are studying the possibility of using the yuan as a reference currency to adjust the rate rupee-ruble. The Chinese yuan is the fourth commercial currency in the world. In addition, China is the largest trading partner of Russia vis-à-vis Russia and the largest trading partner of India also. Given these business structures, where Chinese is a behemoth, the Chinese yuan has the potential to intervene in the regulation rate rupee-ruble.
Russia has never been a major trading partner of India. It accounts for 1.2 percent of India’s world trade, vis-à-vis India which accounts for nearly 3 percent of Russia’s world trade. Crude oil is the main item of trade between the two countries. As a result, India has a trade deficit with Russia. And as mentioned, payment for trade is processed in Indian Rupees. Under the Rupee Payment Mechanism, Indian importers pay for goods imported from Russia to Russian bank accounts in India and, in turn, make payments in Rubles to Russian exporters. Considering the low trade volume, the Rupee-Ruble trade payment mechanism does not hold much importance with the Ruble depreciating due to the war in Ukraine.
Nevertheless, India is a 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 more than 30% against the US dollar since the war between Ukraine and Russia broke out. As for 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. This gives rise to two scenarios when it comes to 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 than it exports, the share of imports is insignificant in total imports. Therefore, the depreciation of the ruble should not generate much gain on imports, with a cascading impact on the balance of payments.
Since arms purchases from Russia play a predominant role in global trade, the depreciation of the ruble is expected to have a major impact on India’s balance of payments. However, there has been a significant drop in purchases of arsenal and military hardware from India to 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.
A sharp decline was seen in the purchase of warplanes and warships. The share of Russian manufacture in India’s total number of defense aircraft has fallen from 81 percent in 2000 to 67 percent in 2020, according to research by the Stimson Center – a think tank. For naval vessels, the share fell from 58% to 44% over the same period.
Therefore, even if the dependence of India for military equipment based on Russia, it is on a downward trend. Significant diversification were made to France, the US and Israel for military procurement. Given this, the importance of trade rupee-ruble for the purchase of military equipment decreases, even if the ruble depreciates.
China is the engine of global manufacturing. As the largest trading partner of India and Russia, the Chinese yuan has an important economic and commercial potential to mediate the rupee-ruble rate. In 2019, China accounted for 22% of world exports from Russia and 13.4% of world imports from Russia. In 2020-2021, China accounted for 7.1% of world exports of India and 16.5% of world imports from India.
Simultaneously, if Russia continues to be ousted from the Swift network because of penalties, it should be based on the global financial system denominated in yuan, according to Shirley Yu Ze, political economist and member of the Harvard Kennedy School of Ash Center. The truth is that Russia has reduced its dependence on the US dollar in recent years and continues to add more yuan into its reserves, as it turns increasingly to the East for its economic development .
Data from the Russian Central Bank shows that while holding Russian 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 to 10, 9%, compared to 21.1% a year ago, according to Global Times. This demonstrates 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.