China was eager to introduce the Chinese yuan as a reference currency for the rupee-ruble rate. According to the state-run Global Times, “India was reportedly considering Chinese yuan a reference currency to settle the rupee-ruble trade”. Owing to the sharp depreciation of the Russian ruble due to the Ukraine invasion, the authorities were grappling for a new rupee-ruble rate. The urgency for it 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 transacted in the Indian rupee. 

The Chinese yuan is seen a cross-border windfall amid sanctions against Russia. Exports predict that the currency will gain more users due to sanctions on Russia. “Yuan appreciated to 6.30/US Dollar on March 2, a high not seen since April 2018,” according to Nikkei. 

Russia is said to have offered oil at a discounted price. However, in giving discounts, the main issue is 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 of Russia and India. Given these trade structures, where China is a behemoth, the yuan has the potential to intervene in settling the rupee-ruble rate. 

Indian trade deficit 

Russia was never a major commercial trade partner of India. It accounts for 1.2 percent of India’s global trade and India accounts for 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. Payment for trade is dealt with in the Indian rupee. 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 pay in rubles to the Russian exporters. Given the low commercial trade volume, the rupee–ruble trade payment mechanism does not hold significance, with the ruble depreciating due to the Ukraine war.   

Nevertheless, India is the largest purchaser of the 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 this backdrop, 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 ruble depreciated by over 30 percent to the US dollar since the Ukraine-Russia war began. In terms of the Indian rupee, the ruble depreciated by over 10 percent. Ruble depreciation is likely to tank further with the uncertainty of the war. These decipher two scenarios of India-Russia trade.  

Ruble depreciation 

First, India will be losing its exports to Russia, given the fact that Indian goods will be costlier. India’s major items of export are pharmaceutical products, tea, and iron and steel besides crude oil and refinery products. Second, though India imports more than export, the share of imports is insignificant in total imports. Hence, ruble depreciation is unlikely to reap much gain in import, with cascading impact on BOP. 

Since arms purchase from Russia plays a predominant role in overall trade, ruble depreciation should have a major impact on India’s BOP. However, there has been a significant drop in India’s purchase of arsenal and military hardware from Russia. During 2012-16, about 69 percent of military hardware and arsenal purchases were from Russia. The share fell to 50 percent during 2017-19, according to SIPRI. 

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

Russian weapons dip 

Therefore, even though there has been major dependence of India on Russian military hardware, it is on the downtrend. Major diversifications were made in military hardware purchases from France, the US and Israel. Given this trend, the significance of the rupee-ruble trade for the purchase of military hardware recedes, even if the ruble depreciates. 

China is the powerhouse of global manufacturing. As it is the biggest trading partner of India as well as Russia, the yuan has significant economic and trade potential to mediate the rupee-ruble rate. In 2019, China accounted for 22 percent of Russia’s world exports and 13.4 percent of Russia’s world imports. In 2020-21, China accounted for 7.1 percent of India’s world exports and 16.5 percent of India’s world imports. 

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

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

(The writer is a former Adviser, Japan External Trade Organization, New Delhi. Views are personal.)