A motorcyclist looks at an employee filling petrol at a fuel station in Mumbai. , Photo Credit: AP
AnnEvson is one of the largest home appliance retailers in Argentina. For decades, it fixed its payments in US dollars for goods it bought from China, such as refrigerators and TV sets. In April, Newson abruptly switched to the Chinese yuan for its payments. Meanwhile, Brazil’s new government, led by President Lula de Silva, recently announced that Brazilian companies can settle their overseas business using the Chinese yuan. As a result, Brazilian companies have started paying French companies in yuan to purchase LNG, a first in their history. The yuan is now the most actively traded currency in Russia. And Bangladesh has been forced to pay for Russian nuclear power using the yuan. These developments are not independent and unrelated.
An important global consequence of the Russia–Ukraine conflict is the US dollar–Chinese yuan conflict. The US dollar has long enjoyed “excessive privilege” by the French finance minister. Almost all countries trade with each other using the US dollar, establishing its supremacy as the world’s reserve currency. Global confidence in the dollar plays an important role in establishing America’s position as a superpower. Obviously, the Chinese are no longer willing to accept American hegemony. Destabilizing and dethroning the US dollar is a major strategy for China to challenge the US. Its proposal and push to invite other countries to switch to the yuan for trade settlement is a part of its grand ambitions to reshape the world order. In this context, India, a trillion dollar trading nation, has a major role to play in determining the new global monetary order.
against the interests of India
China is occupying India’s territory in the Northeast and has put its sovereign integrity at risk. It came close to waging war against India during the pandemic. It is not in India’s interest to aid China’s dominance, so one can expect that India will not aid and abet China’s desire to shift global trade agreements from the dollar to the yuan. But surprisingly, it is doing exactly that – paying for its own overseas business in yuan.
The short-sighted geo-economic strategy of the Modi government has backed India into a corner where it is now forced to help China to the detriment of its own interests. After economic sanctions were imposed by the West against Russia for the Ukraine war, the Modi government decided not to support the sanctions and instead buy Russian oil, as it was apparently available at a discount. Foreign and petroleum ministers made loud announcements on how doing so would help the common Indian deal with low fuel prices and inflation. Since the start of the war, India has imported 15 times more oil from Russia (compared to the previous year), worth $44 billion, money that could potentially be used by Russia to prolong the war.
There was a hitch in this saga – how would India pay Russia for the oil? Normally, it would pay Russia in US dollars, as it does for most of its foreign trade. But Russia could not accept it due to US sanctions. Russia could accept payments in roubles, but this did not suit India, as the value of the ruble could no longer be determined efficiently by currency markets. A bilateral arrangement was considered to establish a reciprocal value between the rupee and the ruble, but this would remind India of the pre-liberalisation days of a bilateral currency arrangement. India would have preferred to pay in rupees, but this did not suit Russia because, contrary to the claims of the Reserve Bank of India, the Indian rupee is neither an international nor a reliable currency, especially after bizarre policies such as demonetization. China sensed an opportunity in this confusion and given its proximity to Russia, the Yuan has emerged as the currency to settle India’s Russian oil purchases.
If India can settle Russian trade in yuan, what is stopping China from demanding that India-China trade be settled in yuan? India-China trade has quadrupled in the last decade and is one-sided, with India importing seven times more from China than it exports. China is India’s second largest trading partner while India is only China’s 13th largest trading partner. In this context, it would be difficult for India to deny or resist a possible Chinese demand for a trade settlement in yuan. If India starts using the yuan for a greater part of its trade, it will give a major boost to China’s ambitions to dominate the new world order. Former Prime Minister Dr. Manmohan Singh gave the same warning more than a year ago Hindu, In short, when China was threatening to trample India, the foolhardy headline hunting geo-economic strategy of the Modi government has helped to lift China’s leg and put it on India’s neck.
no benefit to the common man
The irony is that the common Indian has not even benefited from this uproar. Petrol, diesel and LPG prices for the average Indian household have gone up since the purchase of Russian oil. The prices of essential commodities have increased by 5% during this period. One reason for this is that half of the subsidized Russian oil went to Reliance Industries and Nayara Energy, who refined it and exported it back overseas at higher prices to make super modest profits.
Mr. Modi put India’s national security interests at stake and strengthened China to help two private companies make huge profits by using the Ukraine war as an excuse. In 1971, when asked by foreign media about the role of the US dollar, then US Treasury Secretary John Connally famously said, “The dollar is our currency but your problem”. Perhaps, some of India’s big industrialists can now sneer at other Indians, “Sir.” Modi is our prime minister but the problem is yours.”
Praveen Chakraborty is a political economist and the president of Data Analytics of the Congress Party