The United States dollar has historically served as the primary global currency for energy trading. However, following the onset of the Russia-Ukraine war, the Chinese yuan has received a prominent position in the realm of global energy trading. The aforementioned trend has also garnered significant attention among South Asian nations, including Bangladesh, Sri Lanka, India, and Pakistan. In order to sustain their economic growth, it is imperative for these nations to maintain a consistent and uninterrupted energy supply. This is the rationale behind these countries’ decision to turn to Russia as a prominent global energy supplier. However, the geopolitical developments in 2022, following the Russia-Ukraine war and sanctions by Western nations to Russia have resulted in a significant alteration of global trade patterns. The sanctions have effectively excluded Russia from participating in the financial networks associated with the dollar and euro currencies. With this recent development, the yuan has gained a significant role within Russia’s financial system pertaining to the global energy trade.
Emerging economies are increasingly inclined to transition away from the global dollar system and adopt an alternative framework due to uncertainties of US dollar. In March 2023, the Chinese yuan emerged as the predominant currency for cross-border transactions, surpassing the US dollar in terms of usage in Russia. India, a longstanding strategic partner of the United States in the South Asian and Indo-Pacific region, has recently emerged as the primary purchaser of Russian oil transported through maritime routes. However, India has altered its conventional geopolitical strategy in order to facilitate the payment for this oil. Initially, India issued a request to banks and traders to refrain from utilizing the yuan as a means of payment for Russian imports, citing longstanding political disagreements with China. In international relations, India perceives China as its primary adversary within the regional context. Indian oil refiners have been actively investigating a range of currencies, such as United Arab Emirates dirhams, rubles, and rupees, as potential means to facilitate the settlement of payments for discounted crude oil. But with no viable option available, India has also transitioned to utilizing the yuan as its primary currency for the majority of its energy imports from Russia. Following the implementation of sanctions on Moscow, Indian refiners have predominantly procured Russian crude from traders based in Dubai, as well as Russian oil companies including Rosneft, the Litasco unit of Lukoil, and Gazprom Neft. Indian Oil Corp, the largest purchaser of Russian crude oil in India, has recently paid for Russian oil using the Chinese currency, yuan. The imports of India from Russia experienced a notable increase, reaching an unprecedented level, wherein Russian crude oil constituted 40% of India’s total oil imports in the year 2023.
Before India, Pakistan made its initial government-to-government purchase of Russian crude oil using Chinese Yuan as the payment currency. The bilateral agreement between the governments of Pakistan and Russia involved the procurement of a total of 100,000 metric tons of unrefined petroleum. Of the total, a mere 45,000 tons arrived at Karachi Port. Utilizing the dollar as a payment method would have posed a significant risk for Pakistan due to its potential to exacerbate the country’s external debt burden. The action taken by Pakistan served as an indication that more nations may be inclined to adopt the yuan as a means of conducting cross-border transactions. The acquisition made by Pakistan provided Russia with an additional avenue to expand its sales to India and China, as it diverted oil away from Western markets due to the ongoing war in Ukraine. In spite of its historical alignment with Western nations and its adversarial relationship with neighboring India, the crude deal offered Pakistan a new opportunity during a period of diminished financial reserves. Pakistan has elaborated on a procedure to establish barter trade with Russia and has actively pursued opportunities to engage in commodity transactions that do not involve the use of the US dollar as the medium of exchange. Pakistan has maintained a strong alliance with China, which has been characterized by unwavering support. Furthermore, paying in yuan and fostering close ties with China is advantageous for Pakistan in order to safeguard its interests.
Nevertheless, this trend was introduced in Bangladesh which is not engaged in direct import of Russian crude oil. However, Bangladesh has recently approved the payment of $318 million to Rosatom State Atomic Energy Corporation using yuan. Due to Russia’s exclusion from the SWIFT international money transfer system, the South Asian country faced challenges in paying for the construction of a nuclear power plant in dollars. But now it will be facilitated through China’s Cross-border Interbank Payment System (CIPS). The imposition of sanctions by the United States on Russia prompted Bangladesh to reassess its payment alternatives, resulting in the country opting to make payments in Yuan. Bangladesh’s decision to pay in Yuan also indicates a fair and balanced approach towards its economy, which has traditionally been heavily dependent on the US dollar.
In 2022, Sri Lanka, experienced significant setbacks both in its economic and political domains. Additionally, the unparalleled financial crisis exacerbated Sri Lanka’s inability to meet certain obligations regarding its external debts. The cost of a 90,000 ton shipment of Russian oil, which Sri Lanka intends to procure in order to revive its only refinery, amounts to $72.6 million. However, it is worth noting that Sri Lanka is currently facing a situation where its foreign reserves are at a low level. As a result, the International Monetary Fund (IMF) is currently contemplating the possibility of extending additional loans to the country in order to facilitate economic restructuring efforts. By the March 2023, debt-ridden Sri Lanka’s foreign reserves were $2.69 billion. Therefore, it is foreseeable that Sri Lanka may potentially alter its payment method for oil imports to include the use of Chinese Yuan following the other South Asian countries.
The strategic realignment in South Asia has facilitated the increase in yuan transactions, thereby bolstering China’s endeavors to promote the global adoption of its currency. Moreover, Chinese financial institutions are actively endorsing yuan, particularly in the context of facilitating transactions related to the Russian energy industry. The establishment of the Sino-Russian alliance has facilitated alternative channels for nations to shift from reliance on the United States dollar. Furthermore, countries like India, China, and Russia have been actively promoting the establishment of a diversified financial system and the introduction of a new currency within the framework of the BRICS (Brazil, Russia, India, China, South Africa) alliance. The establishment of an alternative global payment system that is not reliant on the US dollar would enable China to circumvent economic sanctions.
China is actively developing an alternative financial system and promoting reliance on the yuan in the event of a potential crisis related to Taiwan. Moreover, this trend indicates that South Asian nations have recently become participants in the global de-dollarization movement due to low foreign reserves. Yuan experienced a significant lincrease of 12.28% in the year 2022. However, the transition away from the dollar system is not a recent development. China and Russia have been actively endeavoring to decrease their dependence on the United States dollar over a period of time. Additionally, it is anticipated that an increasing number of nations will adopt a similar approach. Initially, the Western sanctions compelled Russia and its trading partners in South Asia to seek alternative means of settling payments, thereby gradually shifting their focus towards China’s Yuan. The Chinese yuan serves as a viable alternative to the United States dollar in the context of settling payments for Russian oil. Furthermore, the South Asian nations are facing a significant concern regarding the depreciation of their domestic currency against the US dollar, primarily attributed to their limited foreign currency reserves.
It is worth noting that China’s increasing geopolitical aspirations to counterbalance the United States have led to an inevitable surge in the value of the yuan. The shift of this energy policy by a transition away from the dollar has garnered significant attention in South Asia. Also, the utilization of the yuan in global energy trade has experienced a significant increase.
Aishwarya Sanjukta Roy Proma is a Research Associate at BRAC Institute of Governance and Development (BIGD).
