India-Russia Trade: Is Indian Rupee Worthless For Cross-Border Transactions?
What good is a currency in global trade if it can not be used to buy products and services from other nations that a country needs? The answer to this question came when Russia said it has accumulated billions of rupees in Indian banks which it can not use. “This is a problem”, Russian Foreign Minister Sergei Lavrov told reporters in India’s Western state of Goa on the sidelines of the Shanghai Cooperation Organization meeting. “We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now”. Russia has decided it won't take any more Indian rupees. Moscow has rejected New Delhi's proposal for the Kremlin to invest rupees from oil and military equipment payments back into Indian capital markets so the currency doesn't pile up.
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| Global Export Map 2023. Source: World Population Review |
Only the currencies issued by the governments of the world's largest exporters are useful for buying products and services on the world markets. China, United States, Germany, Japan and the United Kingdom are the world's top 5 exporting nations as of 2020. This makes Chinese Yuan, US Dollar, European Euro, Japanese Yen and British Pound the most important international trade currencies. Of these currencies, only the Chinese Yuan is not impacted by the western sanctions on trade with Russia. Russia wants India to convert Indian Rupees to Chinese Yuan to pay for energy and military equipment imports from Russia.
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| Yuan vs Dollar in Chinese Cross-Border Trade. Source: Bloomberg |
The share of the Chinese Yuan in international trade has been increasing since the US imposed sanctions on the use of the US dollar in trade with Russia. Earlier this year, the Chinese Yuan eclipsed the US dollar as the most used currency for Chinese cross-border transactions, according to Market Insider. The Yuan's use in cross-border payments and receipts rose to 48.4% at the end of March while the dollar's share slid to 46.7%, according to a Reuters calculation of data from China's State Administration of Foreign Exchange. The yuan's use in global trade finance remains low, though it has shown steady increases. Data from SWIFT showed that the Chinese yuan's share of global currency transactions for trade finance rose to 4.5% in March, while the US dollar accounted for 83.71%, according to Reuters.
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Comments
Interesting - and do you see any impact on gold prices?
Gold Price in Indian Rupee is at a current level of 165970.1 per troy ounce, up from 165491.9 the previous market day and up from 142229.0 one year ago. This is a change of 0.29% from the previous market day and 16.69% from one year ago.
https://ycharts.com/indicators/gold_price_in_indian_rupee#:~:text=Gold%20Price%20in%20Indian%20Rupee%20(I%3AGPIR)&text=Gold%20Price%20in%20Indian%20Rupee%20is%20at%20a%20current%20level,16.69%25%20from%20one%20year%20ago.
https://www.dw.com/en/russias-rupee-problem-risks-harming-trade-ties-with-india/a-65628922
This has left Russian oil companies and banks with billions of rupees in their Indian bank accounts — a pile of cash they are struggling to use.
"I don't think this situation can continue for long," Nandan Unnikrishnan, distinguished fellow and Russia expert at the Observer Research Foundation (ORF) in New Delhi, told DW. "If both sides fail to resolve the problem, it will impact purchases of not only oil but everything."
Russian Foreign Minister Sergei Lavrov also recently commented on the issue while attending a Shanghai Cooperation Organization meeting in the Indian state of Goa.
"We need to use this money. But for this, these rupees must be transferred in another currency, and this is being discussed now," he was quoted by news agency Bloomberg as saying.
The uncertainties over payment mechanisms have also hurt defense imports, Bloomberg reported. New Delhi and Moscow share longstanding political and security ties.
India is a major buyer of Russian weapons, although it has been attempting to diversify its sources of military equipment, increasingly turning to countries like the US and France in recent years.
Russia accounted for $8.5 billion of the $18.3 billion New Delhi has spent on weapons imports since 2017, according to data from the Stockholm International Peace Research Institute.
Both sides are also in talks to reach a free trade agreement.
The Indian government has so far refrained from explicitly criticizing Russia's war in Ukraine. New Delhi has abstained several times from voting on UN resolutions against Moscow. It has, however, called for a peaceful resolution of the conflict through dialogue.
The ramping up of trade ties, meanwhile, has been viewed with concern in Western capitals, as they fear it's undermining the stringent sanctions regime in place against Moscow.
Besides the Indian rupee, the UAE dirhams and the Chinese yuan are seen by some as potential options to settle trade between India and Russia.
"Russia wants a currency that it can use to buy goods that it requires for its economy… the question is identifying that currency," said Unnikrishnan. "Russians would be happy to use the yuan," he underlined, pointing to their bilateral trade worth hundreds of billions of dollars.
In 2022, Russia-China commerce hit a record high of $190 billion.
But Unnikrishnan noted that New Delhi would not be comfortable allowing trade settlement in the yuan, given the tense relations between India and China due to their border disputes.
The Reuters news agency also reported in March, citing Indian officials, that the Indian government had asked banks and businesses to avoid using the yuan to pay for Russian imports.
Another option is the use of UAE dirhams to pay for India's Russian imports but experts say this might not offer a viable long-term solution, due to the sensitivity of that currency to Western sanctions.
Unnikrishnan stressed that India and Russia could come up with alternative solutions, like productively investing the rupees into joint ventures that produce goods that are of use to Russia or could be exported to other parts of the world.
"There are multiple ways to deploy this money, and both sides just have to show the political will to reach that agreement," Unnikrishnan said.
https://finance.yahoo.com/news/russia-pleads-india-help-avoiding-223121729.html
Filip De Mott
Russia could become black listed by the Financial Action Task Force in June.
To avoid this, Moscow is pressuring India to help thwart the blacklisting effort, Bloomberg reported.
Russia has told India that key energy and weapons deals would be at risk.
Russia is asking for India's support to avoid getting on a black list that would further isolate Moscow from global finance, Bloomberg reported.
The pressure comes as the Financial Action Task Force — an intergovernmental group focused on combating money laundering and terrorist financing — prepares for a June meeting, during which members could implement restrictions on Russia.
Though its invasion of Ukraine had already made Russia the world's most heavily sanctioned country, an FATF blacklisting would put Moscow in the same category as North Korea, Iran, and Myanmar.
If Russia is added to the black list, FATF members, banks, investment firms, and payment-processors must perform additional due diligence and could even enact countermeasures, according to Bloomberg.
Because Russia was suspended from FATF in February, it's urging other countries like India to help thwart the blacklisting effort.
The Kremlin has warned India that defense, energy, and transportation deals between the two countries would be at risk under the designation.
They include weapons exports, cooperation between oil firms Rosneft and Nayara Energy Limited, and the development of a railway corridor. Russia is India's top arm supplier and has emerged as a major oil supplier in the last year.
Russia has also said that even being added on the FATF's "gray list" — a less severe measure — would still threaten deals.
Moscow believes that India has "special credibility" within the FATF that should be used, but has also turned to other governments for similar support, sources told Bloomberg. Meanwhile, Ukraine has championed the black listing, but is not a member itself.
Read the original article on Business Insider
The move to retire 2,000-rupee notes, worth $24, has triggered bad memories of a similar campaign in 2016. It has also left some businesses short of change.
Indians have been filing into gas stations, jewelry stores, fruit stands and any other businesses that still accept soon-to-be-withdrawn 2,000-rupee notes, each worth about $24.
The race to spend India’s biggest bill has been on since its central bank announced this month that they would be removed from circulation by early fall.
India’s vast economy remains heavily reliant on cash, and many businesses have welcomed the surge in traffic, even if it has left them a bit short of change. Economists say retiring the big bill may help fight corruption, bring workers into the formal economy, improve tax collection and accelerate India’s push for digital payments.
But for some consumers, the move has dredged up unpleasant memories of 2016, when Prime Minister Narendra Modi’s sudden ban on large notes left them without enough cash for basic transactions. In an economy that is driven by rural and informal workers, some do not own bank accounts — or trust the government’s economic policies.
“It is better to buy gold or silver and keep it,” said Meenu Kevat, 32, a cleaner in New Delhi who does not have a bank account and hoards her cash earnings in a tin box. After the recent ban was announced, she said, it took her four days to cajole shopkeepers into converting 12 of her 2,000-rupee notes into smaller dominations.
“I don’t trust cash now the government can do anything it wants,” Ms. Kevat said, standing outside a grocery store in south Delhi. “It can cancel a note anytime, no matter how small or big.”
The fine print
In 2016, Mr. Modi’s government announced without warning that it was withdrawing India’s two largest denominations at the time — the 500- and 1,000-rupee bills — to expose and penalize people who held huge amounts of money that could not be accounted for.
After that sudden demonetization, A.T.M.s were overrun, and some retail businesses came to a standstill because customers were hoarding the little cash they had. And because the withdrawn notes amounted to about 86 percent of the cash in circulation at the time, the government decided to introduce the 2,000-rupee bill as a “remonetization” measure to ease the currency crunch.
So far, the move to withdraw the 2,000-rupee bills from circulation is causing far less disruption. That may be because they account for less than 11 percent of the currency in circulation. India’s 1.4 billion citizens also have until Sept. 30 to either spend the bills or exchange them at banks. (The bills will remain legal tender after that, but many Indians are taking the deadline seriously, because they worry that government policy could change.)
In the long term, removing the 2,000-rupee bills will probably help with a gradual, positive move toward formalization and transparency, said Phyllis Papadavid, an economist who studied the 2016 demonetization program. More workers should be able to formally register and claim benefits, for example, and there will be higher barriers to tax evasion.
“I can’t think of any aspect of an economy that is worse off by digitalization or formalization, because, basically, you have better usage and management of information, and accountability,” said Ms. Papadavid, the director of research and advisory at Asia House, a research outfit in London.
In the short term, though, the cash rush has caused a few headaches.
https://www.businessinsider.com/dedollarization-russia-dollar-yuan-billions-india-struggle-use-ruble-2023-6
Russia's amassing $1 billion worth of Indian rupees each month that it's struggling to use.
India has been buying Russian oil using rupees as Moscow has been shut out of the USD-denominated global payments system.
But Russia now has problems using the rupees and repatriating the currency.
@RnaudBertrand
SCMP editorial: https://scmp.com/comment/opinion/article/3242880/dollar-still-king-how-much-longer
"The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap...
In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.
In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift."
https://x.com/RnaudBertrand/status/1728923824996139481?s=20
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The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap worth a maximum of 50 billion yuan (HK$55 billion) over the next three years.
In immediate terms, the pact will foster bilateral commerce denominated in both the yuan and the riyal. In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.
In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift. It has been a very long time coming.
Almost a year ago, President Xi Jinping made a historic visit to Riyadh, followed by Hong Kong Chief Executive John Lee Ka-chiu in February. A flurry of deals followed.
The Shanghai Stock Exchange and its Saudi counterpart have started collaboration on cross-listings, including exchange-traded funds (ETFs), financial technology (fintech), environmental, social and governance (ESG) and data exchange.
China, Saudi Arabia central banks sign currency swap accord to foster trade
21 Nov 2023
The People’s Bank of China (PBOC) building in Beijing on Tuesday, April 18, 2023. Photo: Bloomberg
The Hong Kong Monetary Authority, the city’s de facto central bank, and the Saudi Central Bank have enhanced ties covering the latest technologies in regulatory supervision and monitoring, and in financial fields such as tokenisation and new payment systems.
However, the latest currency swap pact will be the most important. It means trade can be conducted in local currencies, instead of defaulting to the US dollar. This may be seen as a challenge to US dollar dominance. Perhaps in the longer term, it is. But there is a good economic reason.
The current US federal interest rate of 5-plus per cent has pushed the dollar to historical levels against most other currencies, making trade denominated in the dollar more expensive.
There are obvious advantages for two big trade partners like China and Saudi Arabia to be able to utilise a local-currency option, which will help relieve pressures from having to trade in a more expensive currency.
Global “de-dollarisation” may take a while yet, but the trend already reflects cracks in a global economy long used to US currency settlements.
The yuan may or may not pose a challenge to dollar hegemony, but its internationalisation continues apace – to the benefit of both the Chinese and global economies.