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Why China Wants Yuan As Reference Currency For Rupee-Ruble Rate – Analysis


Chinese official news media Global Times was upbeat to introduce the Chinese Yuan as a reference currency for the Rupee-Ruble rate. Owing to a sharp depreciation of the Russian Ruble due to Ukraine invasion by Russia, the authorities were grappling for new Rupee-Ruble rate. The urgency for new a Rupee-Ruble rate emanated from the global sanctions against the import of oil, as well as military hardware from Russia. The sanctions are not applicable to India’s import of commercial goods, including crude oil and military hardware from Russia as they are not denominated in US Dollar, but instead transacted in Indian Rupees.  


Russia is said to have offered oil at discounted price, which will exclude transport and insurance costs. Russian crude is costlier than that from the Middle East due to higher freight costs. However, in giving  discounted oil, the main issue is the Rupee-Ruble rate. The rate is fixed annually.  According to “ Livemint”, India and Russia are exploring the possibility of using the Yuan as a reference currency to settle the Rupee–Ruble rate. The Chinese Yuan is the fourth largest trade currency in the world. In addition, China is the biggest trading partner for Russia vis-a vis and the biggest trading partner of India also. Given these trade structures, where Chinese is a behemoth, the Chinese Yuan has  potential to intervene in settling the Rupee-Ruble rate.

Russia was never a major commercial trade partner of India. It accounts for 1.2 percent of India’s global trade, vis-a vis India accounting nearly 3 percent of Russia’s global trade. Crude oil is the major item of commercial trade between the two countries. As a result, India has a trade deficit with Russia. And as mentioned, payment for trade is dealt in Indian Rupees. Under the Rupee payment mechanism, Indian importers pay for goods imported from Russia to the accounts of Russian banks in India and they, in turn, make payments in Rubles to the Russian exporters. Given the low commercial trade volume, the Rupee–Ruble trade payment mechanism does not hold much significance with The Ruble depreciating due to Ukraine war.   

Nevertheless, India is a big purchaser of Russian arsenal and military hardware. Currently, nearly half of India’s defence purchases are made from Russia, according to SIPRI ( Stockholm International Peace Research Institute).  Against these backdrops, the Rupee-Ruble rate holds significance in India’s Balance of Payment (BOP).

One of the issues is in what currency the arms and oil trade should be dealt. The Russian Ruble has depreciated by over 30 percent to the US dollar since the Ukraine-Russia war broke out. In terms of the Indian Rupee, the Ruble  has depreciated by over 10 percent. Ruble depreciation is likely to tank further with the uncertainty of war continuing. This lends to two scenarios with regard to India-Russia trade. First, India will be losing its exports to Russia, given the fact that Indian goods will be costlier. India’s major items of export to Russia are pharmaceutical products, tea and iron, steel, besides crude oil and refinery products. Second, though India imports more than it exports, the share of imports is insignificant in total import. Hence, the Ruble depreciation is unlikely to reap much gain in imports, with a cascading impact on BOP. 

Since arms purchases from Russia plays a predominant role in overall trade, The Ruble depreciation should have a major impact on India’s BOP. However, there has been significant drop in India’ s purchases of arsenal and military hardware from Russia. During 2012-2016, about 69 percent of military hardware and arsenal purchases was from Russia. The share fell to 50 percent during 2017-19, according to SIPRI. 


A big drop was noticed in the purchase of aircraft and navy ships. The Russian-made share in India’s total number of defence aircraft fell from 81 percent in 2000 to  67 percent in 2020, according to a research by the Stimson Centre – a think tank. For navy ships, the share declined from 58 percent to 44 percent over the same period.

Therefore, even though India’s large dependence for military hardware rests on Russia, it is on the downtrend. Major diversifications were made to France, the USA and Israel for military hardware purchases. Given this, the significance of the Rupee-Ruble trade for purchase of military hardware recedes, even if the Ruble depreciates .

China is the powerhouse for global manufacturing. As it is the biggest trading partner of India as well as Russia, The Chinese Yuan has significant economic and trade potential to mediate the Rupee-Ruble rate. In 2019, China accounted for 22 percent of Russia’s world export and 13.4 percent of Russia’s world import. In 2020-21, China accounted for 7.1 percent of India’s world export and 16.5 percent India’s world import. 

Concurrently, if Russia continues to be ousted from Swift  network due to sanctions, it would have to rely on Yuan denominated  global financial system, according to Shirley Ze Yu, a political economist and fellow at Harvard Kennedy School of Ash Center. The truth of the fact is that Russia has been reducing its dependence on the US Dollar for the past few years and continues to add more Yuan in its reserves as it is increasingly look eastwards for economic development. 

Data from the Russian Central Bank shows that while the Russian Yuan holding increased substantially from 12.8 percent  to 17.1 percent as of January 1, 2022, its holding of US Dollar slipped to almost half at 10.9 percent, from 21.1 percent, a year ago, according to Global Times. This demonstrates that Russia will increase its Yuan holdings and prefer to use local currency as reference for expansion of trade, instead of US Dollar. 

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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