Yuan dilemma in Russia trade


Dilasha Seth & Ravi Dutta Mishra

Bengaluru/ New Delhi: With the Reserve Bank of India’s rupee settlement mechanism still in its early days, Russian buyers are offering payments to Indian exporters in yuan.

Indian exporters have flagged the issue with India’s commerce ministry, stating that acceptance of yuan payments will further strengthen the Chinese currency, running counter to the government’s objective of internationalizing the Indian rupee.

Some exporters have already accepted payments in yuan in the backdrop of Russia selling oil to China and accepting yuan payments. Merchandise trade between Russia and China touched a record $190 billion in 2022, up more than 34% from 2021, data released by Chinese customs showed. Exporters say that most banks are still waiting for standard operating procedures (SOP) from the RBI with regard to the rupee settlement mechanism to take it forward, thereby slowing down the initiative. Besides, banks are apprehensive and reluctant to push the Rupee payment mechanism due to uncertainty and perceived risks. Some banks are still in the process of completing the formalities for a special vostro account with their counterparts.

“Russian buyers prefer payments in euro or Chinese yuan. It seems that Russia has sold oil to China in yuan, and the money may be being used for importing from other countries, including India,” said Ajay Sahai, director general of Federation of Indian Export Organisations.

India’s imports from Russia grew by 417% to $29 billion in the April-November period, led by crude oil.“If some portion of that is pushed through rupee settlement, it will create enough corpus to push exports in Indian rupee and will provide a boost to our exports,” Sahai said. He added that imports need to be facilitated under rupee settlement so that a corpus is created for payments for exports under this mechanism.

Yuan is being offered to Indian exporters at a time China has become a stronger trade partner with Russia after the war.

“Some transactions involving Russian shipments have already been settled in yuan. We want to promote trade in the Indian rupee so that our currency gathers more momentum in the future,” said Arun Kumar Garodia, chairman of the Engineering Export Promotion Council (EEPC).

“It is concerning because we already have a huge trade deficit with China, and Beijing is giving cut-throat competition to India,” he said. “While trade between China and Russia was going strong, Russia now wants to scale up shipments from India. However, the rupee settlement mechanism has not picked up as expected, else much more business would have flown in from Russia,” he added. Garodia explained that banks are reluctant as there could be US sanctions. “They are not saying it aloud, but that risk is there. We have been trying to figure out a solution along with the government and the RBI,” he said.

Incidentally, according to news reports, the government has asked banks to designate nodal officers who can act as a single point of contact to facilitate and promote ‘international trade settlement in Indian rupees’ and open special rupee vostro accounts. Nine Indian banks have been given approval to open as many as 17 special vostro rupee accounts for trade settlement with Russia.

Mint reported earlier that exporters are looking at ways to deal directly with Russia’s Sberbank branch in India for trade settlement so that the risk of sanctions on private Indian banks could be avoided.

Economists suggested that private banks will do their own risk assessment to deal with business risks.

“The rupee is not as accepted as the yuan. The rupee settlement mechanism was partly a quick response to the problems that had arisen. Because the dollar could no longer be used as there were settlement issues,” said Abheek Barua, chief economist at HDFC Bank. He added private banks would assess which companies they want to deal with.

“They fear regulatory risk. But in this case, there is no such risk as both RBI and the government are behind the companies involved in the settlement. But there are other risks, such as delays in payment and credit cycles being prolonged,” he said.

“These are real risks, and you cannot force any bank to take on these risks unnecessarily. For instance, Russia, because of the sanctions, could be witnessing 3-4% negative growth in the economy. So there are other factors involved,” said Barua.

Queries emailed to the ministry of commerce and industry, the ministry of finance, and the Embassies of Russia and China in New Delhi remained unanswered till press time.

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