Chinese Yuan Gains Prominence As Indian Refiners Seek Alternatives To US Dollar For Settling Russian Oil Payments

Indian refiners have reportedly started using Chinese yuan to pay for some of their oil imports from Russia.

This shift comes as Western sanctions against Moscow and its customers make it necessary to find alternatives to the US dollar for settling payments.

The global trade flows for Russia's top export have been significantly affected by Western punishments over its invasion of Ukraine.

Despite the challenges posed by payment modes amid shifting sanctions, India has emerged as the largest buyer of seaborne Russian oil.

Traditionally, the US dollar has been the dominant currency for global oil transactions, including those made by India.

However, the yuan is now playing an increasingly significant role in Russia's financial system due to Moscow's exclusion from the dollar and euro financial networks as a result of international sanctions.

China, too, has made a similar shift towards using the yuan for most of its energy imports from Russia.

In fact, Russia surpassed Saudi Arabia to become China's leading crude supplier in the first quarter of this year.

According to an Indian government source quoted by Reuters, certain refiners are resorting to paying in currencies like yuan when banks are unwilling to settle trade in dollars.

In June, Indian Oil Corp, the largest purchaser of Russian crude oil in India, became the first state refiner to make payments for some Russian purchases in yuan, as confirmed by three sources familiar with the matter.

Additionally, at least two of India's three private refiners are also opting to pay for certain Russian imports in yuan.

According to sources cited in the Reuters report, it is not yet clear how much Russian oil Indian refiners have purchased using yuan. However, Indian Oil has already made payments in yuan for multiple shipments.

The increased use of yuan for payments has supported China's goal of making its currency more international. Chinese banks have been actively promoting the use of yuan specifically for trading Russian oil.

In light of the sanctions imposed on Moscow, Indian refiners have primarily been buying Russian crude from Dubai-based traders and Russian oil companies like Rosneft, Lukoil's Litasco unit, and Gazprom Neft.

Indian refiners have also made non-dollar payments for Russian oil using the United Arab Emirates' dirham.

The first preference for payment is in dollars, but sometimes refiners pay in other currencies like dirham and yuan when requested by sellers, Reuters reported citing an Indian government source.

In March, Reuters reported that India had urged banks and traders to avoid using the yuan for paying Russian imports due to longstanding political differences with China.

However, it remains unclear whether recent purchases indicate a change in this stance.

In May, India's imports from Russia reached a record high, with Russian crude oil accounting for 40 per cent of the country's total oil imports, compared to 16.5 per cent the previous year. This increase has adversely impacted purchases from Iraq and Saudi Arabia.

Although India does not recognise Western sanctions against Moscow and its purchases of Russian oil may not technically violate them, Indian banks are cautious about processing payments for such imports.

State Bank of India, the country's leading lender and a major banker for state refiners, have reportedly declined to accept the Indian Oil Corporation's planned payment in dollars for a cargo delivered by Rosneft in May.

The cargo was loaded onto the NS Bora tanker, which is managed by Dubai-based Sun Ship Management. It is worth noting that Sun Ship Management is connected to Sovcomflot, Russia's largest state shipping company, which was sanctioned by the European Union in February and by the United Kingdom in May.

In June, IOC reportedly utilised ICICI Bank, a private-sector Indian lender, to settle a trade with Rosneft by paying in yuan to Bank of China.

One private refiner has also been using the same payment mechanism for Russian oil.

IOC has continued to use the yuan payment method for other shipments from Rosneft since then.

According to the source cited in the report, whenever IOC encounters difficulties, it prefers to push for payment in yuan.

Additionally, IOC has requested Rosneft to consider supplying oil in vessels not managed by sanctioned entities.

Another state refiner, Bharat Petroleum Corp Ltd, is reportedly also considering using yuan as payment for Russian oil.