What is the Yuan Challenge?

July 16, 2024

India has been trying to become less dependent on the US dollar and lower its oil import costs by trading more with Russia in recent years. Trade between the two countries is supposed to reach $100 billion by 2030. However, after the war in Ukraine in 2022, the relationship changed, with India buying a lot more oil from Russia. Russia is benefiting from India’s trade imbalance because it saves money by buying cheaper oil from Russia but not exporting enough to balance the trade, which is currently at a deficit of $57 billion out of $66 billion in FY24.

The Challenge of Unbalanced Trade

Due to India’s huge trade gap with Russia, Russian oil exporters want to be paid in Chinese yuan instead of US dollars or Indian rupees. With more equal trade between China and Russia, where the yuan is widely used, this change has happened. Chinese currency (yuan) has become more common in the Russian market, which makes it harder for the rupee to become used around the world.

Efforts to Internationalize the Rupee

India’s plan to make the rupee more widely used around the world has been slowed down by its trade partners’ reluctance and the rupee’s limited use in offshore foreign exchange markets. The Reserve Bank of India intended to increase the role of the rupee by introducing a plan in July 2022 that let rupees be used as payment in foreign trade. However, the rupee’s instability and limited use in trade deals, compared to the strong US dollar and the rising yuan, continue to be problems.

Export Challenges to Russia

India’s exports to Russia are affected by worries about possible Western penalties among private banks, which are necessary for international trade financing. Concerned about how working with Russia might affect their operations in the West, most private banks are cautious when doing business with Russia. Swapping rupees for rubles is a complicated issue that makes using local currencies for trade payments even more difficult.

Future Trade Prospects and Strategic Plans

Overcoming the trade deficit and promoting economic unity is something that India and Russia are working on in many areas. Focusing on lowering trade barriers, talking about a possible trade deal with the Eurasian Economic Union (EEU), and improving cooperation in important areas like chemicals, metals, and transportation planning. This is meant to make trade between the two countries easier and more widespread, possibly getting around current problems and helping both countries’ economies grow.

About India-Russia trade dynamics

Trade Growth and Diversification: India and Russia’s trade hit $11.5 billion in FY22, even though there were changes in world politics. The trade partnership used to be mostly about defense, but now it includes areas like pharmaceuticals, energy, and IT.
Energy and Defense Cooperation: Russia is very important to India’s energy security because it sends a lot of oil and military equipment to the country. India bought a lot more from Russia in 2022, especially oil at lower prices after the war in Ukraine.
Future Goals and Financial Strategies: India sends goods to Russia like tools, medicines, and tea. The two countries want to trade $30 billion worth of goods by 2025. They are also thinking about accepting payments in their currencies because of the effects of Western sanctions on Russia.

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