Yuan trade dilemma in Russia

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BENGALURU / NEW DELHI : With the Reserve Bank of India clearing mechanism still in its infancy, Russian buyers are offering payments to Indian exporters in yuan.

Indian exporters have raised the issue with the Indian Ministry of Commerce, stating that accepting payments in yuan will further strengthen the Chinese currency, going against the government’s goal of internationalizing the Indian rupee.

Some exporters have already accepted yuan payments against the backdrop of Russia selling oil to China and accepting yuan payments. Trade in goods between Russia and China reached a record $190 billion in 2022, an increase of more than 34% from 2021, according to data released by China’s customs authorities. Exporters say most banks are still waiting for Standard Operating Procedures (SOP) from the RBI regarding the rupee settlement mechanism to move forward, delaying the initiative. In addition, banks are apprehensive and reluctant to push the Rupee payment mechanism due to uncertainty and perceived risks. Some banks are still finalizing the formalities for a special vostro account with their counterparts.

“Russian buyers prefer payments in euros or Chinese yuan. It appears that Russia has been selling oil to China in yuan and that the money may be used for imports from other countries, including India,” said Ajay Sahai, director general of the Federation of Indian Export Organizations.

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

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

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

“It’s worrying because we already have a huge trade deficit with China, and Beijing is giving fierce competition to India,” he said. However, the rupee settlement mechanism has not kicked in as expected otherwise many more cases would have come in from Russia,” he added. Garodia explained that banks are hesitant because US sanctions could come. “They don’t say it out loud, but that risk is there. We have been working with the government and the RBI to try and find a solution,” he said.

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

TBEN previously reported that exporters are seeking ways to deal directly with Russia’s Sberbank branch in India for trade arrangements, avoiding the risk of sanctions against private Indian banks.

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

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“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 because there were settlement problems,” said Abheek Barua, chief economist at HDFC Bank. He added that private banks would assess which companies they want to do business with.

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

“These are real risks and you cannot force any bank to take these risks unnecessarily. For example, Russia could witness a negative growth of the economy of 3-4% due to the sanctions. So there are other factors involved,” Barua said.

Email inquiries to the Ministry of Trade and Industry, the Ministry of Finance and the Russian and Chinese embassies in New Delhi went unanswered until press time.

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