Impact of Yuan in Indo-Russian Trade Amid Sanctions

India faces a complex balancing act in its foreign policy. While maintaining its 'all-weather friend' relationship with Russia, which includes strong defense ties and access to cheap oil, India must also manage its relationship with the West and NATO. The concern is that Russia's first visit abroad after the Ukraine conflict was to China, which India worries about as it doesn't want to push Russia completely into the Chinese corner. Russia and China have developed a special relationship driven by mutual strategic interests, with trade growing to $240 billion. Russia wants to balance its ties with China and doesn't want to become over-dependent on China. India is the only country in Asia that can help balance China. India must look after its national interests while not getting embarrassed by criticism from Western leaders.

India maintains a complex diplomatic position by participating in both Western structures like the Quad and anti-Western alliances like BRICS and SCO. This non-alignment strategy creates mutual dependencies with the United States, where America is India's largest trading partner and major investor, while India provides Washington with a strategic partner in containing China. India's relationship with Russia, which supplied 69% of its arms imports between 2012-2017, serves as a counterbalance to China. However, India's defense industry development and the Russia-Ukraine war are straining these traditional partnerships.

India, under Prime Minister Narendra Modi, maintains a strategic balancing act between Russia and the United States, leveraging its historical partnership with Russia (which provides 97% of India's 4,000 tanks and has assisted in nuclear power plants and space programs since the 1960s) while simultaneously strengthening ties with the West to counter China, demonstrating how emerging powers navigate complex geopolitical relationships to serve their national interests.

India is strategically balancing its relationships with major global powers by simultaneously pursuing diplomatic ties with Russia (through President Putin's visit) and China (through Prime Minister Modi's planned visit), while facing economic pressure from the United States through increased tariffs on Indian goods, demonstrating how nations navigate complex geopolitical dynamics by maintaining multiple strategic partnerships.

India maintains a delicate foreign policy balancing act, seeking to demonstrate importance to Russia while simultaneously securing American support. India fears that complete alignment with Russia may cause the United States to abandon it during critical moments. India has used its economic leverage, particularly oil purchases, to maintain influence in Russia-India relations. This strategic balancing reflects the complex geopolitical reality where nations must navigate multiple power centers simultaneously, managing relationships with both traditional allies and emerging powers to avoid strategic vulnerability.

According to SWIFT RMB Tracker data from 2025, the international settlement share of the Chinese yuan (RMB) is only 2.73%, compared to the US dollar's 59.86%, the euro's 12.97%, and the Japanese yen's 5.42%. This means RMB settlement is less than half of Japanese yen transactions and less than one-fifth of US dollar transactions. China's RMB faces significant challenges to becoming a global currency due to fundamental structural weaknesses: suspected GDP manipulation, real estate sector collapse with hidden debts of approximately 2300 trillion yuan, severe capital controls restricting foreign investment, and governance uncertainty where economic policy may prioritize regime survival over rational management. The RMB's international status remains significantly weaker than China's ambitions suggest.

The internationalization of the RMB faces significant obstacles, most importantly the need for China to fully open its government bond market to international investors. While China has opened its bond market to foreign investors, trading remains regulated, and capital controls and restrictions on capital flows limit full internationalization.

China's RMB (Yuan) faces significant challenges in internationalization, with only 2.73% of global payment transactions compared to the US dollar's 59.86%, due to structural economic issues including local government debt, capital controls, and concerns about economic data transparency, which undermine international confidence in the currency.

China has pursued RMB internationalization for 15+ years through bilateral currency swaps with 32 countries and IMF SDR inclusion, though these efforts represent a small proportion of global trade. China will pursue full capital account liberalization when it believes it is 'big enough and ugly enough' not to be rolled over by the U.S. or allies in financial sanctions. This represents a psychological threshold in Chinese leadership thinking. The relative size of the Chinese economy against the U.S. economy matters in domestic political perception terms.

China's efforts to create alternatives to the US dollar system face practical limitations. Countries don't want RMB because it is only useful for buying Chinese goods, and even pariah states like Iran face difficulties using the system because cheap Chinese imports are wrecking their economies. The flood of cheap imports creates domestic backlash that undermines the very purpose of creating an alternative financial system. China's giving Iran and the US common ground on opposing cheap imports reveals the complexity of using economic power to shield against sanctions.

Central Bank Digital Currencies (CBDCs) are emerging as alternatives to traditional payment systems. Over 110 countries are researching CBDCs, with 11 countries having launched pilot programs. China's digital yuan has reached 260 million users and was successfully tested during the Olympics for international use. The European Central Bank is launching a digital euro pilot in 2025. Russia's digital ruble is being developed partly as a tool to evade sanctions. These digital currencies could potentially compete with SWIFT and reduce US dominance in international payments.

BRICS nations are developing an alternative international payment system using Central Bank Digital Currencies (CBDCs) through the mBridge project, which includes UAE, China, Hong Kong, Thailand, and Saudi Arabia. This system allows countries to settle international trade in local currencies rather than US dollars. The system is designed to work through periodic gold settlements, similar to historical bills of exchange, to prevent countries from accumulating unwanted foreign currency.

Cross-border payments have historically been based on correspondent banking, which has largely collapsed due to compliance rules and costs. This system does not work as well as it should. Central bank digital currencies can help improve the international system by providing liquidity across borders, facilitating financial inclusion between advanced and emerging economies, and making the global financial system easier and smoother to operate.

Project Jura was a BIS innovation experiment involving Banco de France, Ripple partner Accenture, Credit Suisse, and UBS over three days. On day one, tokenized French commercial paper was issued, with UBS buying it using Euro wholesale CBDCs and Credit Suisse settling FX transactions. On day two, UBS sold the paper to Credit Suisse in a secondary market transaction. On day three, Credit Suisse redeemed the paper and settled FX transactions. This explored more efficient and secure central bank money with new technology. Project Dunbar is a BIS-led initiative using CBDCs on a single platform with participation from Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and South African Reserve Bank. In the sandbox, four central banks demonstrated how easy it is to send money using the system, which can use XRP or XTC to settle transactions. A Malaysian commercial bank holds 10 million digital Malaysian Ringgit while a Singapore bank holds 10 million Singaporean dollars and 10 million digital Australian dollars. Sponsoring banks in Australia provide oversight for cross-border transactions. The system uses oracle nodes for real-time market data. This demonstrates how CBDCs can enable instant cross-border payments, potentially saving 60-70% in costs compared to correspondent banking.

Central bank digital currencies will enable fast, nearly immediate, and cheap transfers between nations, replacing the current SWIFT system where banks charge significant fees (sometimes $40 for transfers that cost only cents). This is fundamentally good for global trade and would be implemented through specialized systems designed by the Bank for International Settlements (BIS).