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India Insider: Why Russian Oil Should Be Treated Skeptically

by with No Comment AMT MarketsCommoditiesFeatured Highlights

India Insider: Why Russian Oil Should Be Treated Skeptically

As Russian President Vladimir Putin arrives in New Delhi for a bilateral summit, the mood in India’s capital is one of profound strategic tension. The core of the problem is India’s massive appetite for discounted Russian Crude Oil, which has shielded the economy from high energy prices but is now causing significant financial and geopolitical risks. This move comes at a time when India’s most important trade surpluses lies with the West, raising anxieties about U.S sanctions and shrinking strategic space.

Trapped Rupee Problem

Since the Ukraine war, Russia’s share of India’s Crude Oil imports has surged from under 2% to nearly 40%. This has simultaneously inflated India’s trade deficit with Russia to nearly $59 billion.

The transactions are largely settled in Indian Rupees (INR). Moscow has accumulated billions of Rupees in Indian banks. However, because the Rupee is not fully convertible on the global market, Russia has very limited ways to use this huge surplus within India. These billions of Rupees are essentially ‘trapped liquidity’ – a problem neither country can easily solve.

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India – Russia Bilateral Merchandise Trade Chart from 2017 – 2024

The Kremlin, meanwhile, is shifting its financial allegiance. It is preparing to issue Yuan denominated sovereign bonds, a decisive step that deepens its reliance on Beijing’s financial system amid a cut off from the Western financial system. This financial trajectory clearly signals the next logical step: Russia will inevitably demand that India begin paying for its oil shipments in Chinese Yuan (CNY).

Structural Risk of Holding Chinese Yuan

India has never been comfortable holding Chinese Yuan or settling trades in the currency. That’s partly strategic as New Delhi wants to protect its geopolitical autonomy and position itself as the democratic anchor of the Global South while staying closely aligned with the West.

But Russia’s financial plumbing is now increasingly routed through China. As the Kremlin becomes more deeply integrated into China’s banking and payments system, its dependence on the Yuan becomes structural. Moscow needs Yuan not only to service Chinese creditors, but also to pay for its expanding list of manufactured imports from China. The Ruble, being a largely non-convertible currency, simply cannot support this scale of trade.

For now, Russia-China trade is balanced enough because Beijing still buys large quantities of Russian energy. But this equilibrium can shift quickly. As the Ukraine war drags on and Moscow’s defense spending rises, the Kremlin will be forced to rely even more heavily on Chinese financing, Chinese goods, and ultimately the Yuan itself, tightening its economic dependency on Beijing.

When that moment arrives, the Reserve Bank of India (RBI) will be forced to accumulate Yuan as part of its Forex reserves to ensure the continued flow of oil. This decision, born of necessity, introduces a structural vulnerability into India’s financial system as the adoption of Yuan as a reserve currency subject to China’s capital controls.

Risks of Holding the Yuan

China may have both the onshore (CNY) and offshore (CNH) Yuan, but the currency is ultimately controlled by the PBOC, which makes it a risky reserve asset for India. In a crisis, Beijing’s capital controls could restrict liquidity and prevent the RBI from freely converting yuan into hard currency like the USD, effectively trapping India’s capital.

Beyond this financial rigidity, large Yuan holdings also expose India to CCP driven political risk, tying its external stability to China’s domestic decisions. And unlike the Dollar which can be deployed anywhere, Yuan reserves are usable mainly for transactions with China or countries in its financial orbit, sharply limiting India’s strategic and financial flexibility.

Strategic Win for Beijing

For Beijing, this shift delivers a double strategic win, cementing the Yuan as the dominant settlement currency across Eurasia especially among countries squeezed by Western sanctions and it allows the yuan to slip into India’s financial system indirectly, not through Chinese pressure but through Russia’s growing dependence on Chinese finance and India’s reliance on discounted Russian oil.

For Moscow, this is a reluctant compromise: giving up some monetary autonomy in exchange for necessary financial support from China.

For India, however, it introduces a new long term structural risk with a slow but steady Yuan encroachment into its trade and reserve system, operating alongside the dominant U.S Dollar. The oil corridor that was meant to offer an independent strategic opportunity for India is now becoming a channel which Beijing can strengthen its monetary footprint. In this complex triangle, India risks paying a dangerous tactical long-term price for its energy security.

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Dog Days of Summer and a Return of Calm as Storms Threaten

by with No Comment AMT MarketsBehavioral SentimentFeatured Highlights

Dog Days of Summer and a Return of Calm as Storms Threaten

With essentially two full weeks of trading until the end of August and the unofficial end of summer in sight, perhaps this week may be a good time for retail traders to be observers if they do not have the stomach for potentially noisy speeches and markets.

However, speculators who can block out media hyperbole and microphone soundbites from folks standing on podiums may find conditions rather attractive. As always outlook depends on perspective, time frames and managing risk. Behavioral sentiment has been rather chaotic the past month and some traders may suspect we are approaching the end of the loud spectacles of nervous drama in the markets.

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USD/ZAR One Year Chart as of 20th August 2023

The economic data this coming week should prove to be a rather mild schedule, but outside influences will certainly get publicity and get fanfare from talking heads who want 15 minutes of your attention. The BRICS Summit will get underway in Johannesburg, South Africa officially on the 22nd. Another big conference later this week will be the U.S Federal Reserve’s Jackson Hole Symposium. Both events will produce plenty of conversations about inflation, economic stability and a more cohesive global cooperation monetarily. This will also create many raised eyebrows among traders who are skeptical about these type of events.

While leaders of China, Russia, India, Brasil and South Africa get together in Johannesburg, it is likely we will hear talk about potential BRICS expansion and the pursuit of a new unified currency which doesn’t rely upon the USD. However, in the background there is likely to be plenty of distraction because of China’s faltering economic data and Russia’s Ruble which has been impacted severely in the past month. Plenty of large rugs will be needed to hide the dust which threatens to make this BRICS event rather memorable.

Add the ongoing saga of Niger and the absence of a political solution for the world’s fourth largest producer of uranium as a potential flash point standing on the side of the stage waiting to make an appearance regarding Africa news. Perhaps it is too cynical to wonder if coordinated military action within Niger will await the end of the BRICS Summit. This so China and Russia are not given an opportunity on the ‘world stage’ as a united voice to offer their opinions regarding an intervention.

The Jackson Hole get together of global central bankers from the Fed, BoE, ECB, BoJ and others will certainly grab headlines late this week, but the script is mostly known regarding the rhetoric to come from the Federal Reserve’s annual event. Forex may move based on comments from the central bank chiefs as they speak towards the end of this week, but it is unlikely anything surprising is going to be heard. U.S Treasuries will remain a topic because of the ability to lock in a solid return over the mid-term compared to betting on the outcomes of the stock market, but this scenario has been playing out the past month. Investors should prepare for a long line of speeches regarding economic outlooks from central bank officials all week. Day traders should also remember that the chatter starts to be ‘tuned out’ as the speeches grow longer.

Traders looking for other outside influences may want to look at the cryptocurrency market where major assets have shown signs of struggling. Bitcoin and Binance coin could remain in the headlines for all the wrong reasons, if their prices continue to challenge important support levels and become more vulnerable.

Monday, 21st August, China Prime Rates – economic data from the nation has caused concerns that real estate problems are spilling over into the domestic consumer market. The interest rates China lends money to consumers is expected to be lowered to try and spark spending. Recent economic reports from China have been bad, and readers who believe this is merely ‘Western’ bias being reported should be careful to look for other sources to confirm data. Investment within the second biggest economy of the world has become tentative, because there is a fear the ‘official’ China numbers may be worse than those being reported.

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USD/JPY Six Months Chart as of 20th August 2023

Tuesday, 22nd August, Japan Consumer Price Index – the Bank of Japan report is expected to show a slight decline to the inflation numbers. Last month’s outcome of 3.0% is expected to lower and produce a 2.9% result. The USD/JPY could react momentarily to the outcome, the currency pair is near highs it hasn’t touched since November 2022.

Tuesday, 22nd August, U.S Existing Home Sales – the data is expected to show a slight decline of purchases. Mortgage prices continue to climb in the U.S and homeowners are less likely to desire taking on a new higher mortgage, this if they already have a lower mortgage locked in from a few years ago within a dwelling they already live.

Wednesday, 23rd August, Flash European Manufacturing and Services PMI – the reports will come from the E.U and U.K. The German and British outcomes will stir the Forex markets. The manufacturing data from Germany and Britain are forecast to be slightly negative.

Wednesday, 23rd of August, U.S Flash Manufacturing and Services PMI – the U.S reports are expected to show a decline in the manufacturing sector. If a negative result materializes, this could actually spark a selloff of the USD – if the financial markets have returned to calm waters by the middle of this week. Weaker numbers might be interpreted as another reason for the U.S Federal Reserve to remain neutral and why they should consider becoming dovish over the mid-term.

Thursday, 24th of August, U.S Durable Goods Orders – the core and broad numbers are anticipated to show declines. If the Durable Goods Orders numbers are worse than expected this could spark more USD selling, particularly if financial institutions are already calm and feel the data is another step to ‘lowering’ the Fed’s hawkish interest rate rhetoric. However, for the USD to weaken the markets will likely have needed to be tranquil beforehand, without major surprises having happened earlier in the week that may have escalated nervous behavioral sentiment in the broad markets.

Friday, 25th of August, Germany Business Climate and GDP – the ifo Business Climate report comes from a composite of manufacturers, wholesalers, and other enterprises and is expected to be lower than last month’s outcome. The Gross Domestic Product results are anticipated to show no changes, which would mean Germany’s economy remains in the doldrums and is flirting with recessionary pressures.

Friday, 25th of August, U.S University of Michigan Consumer Sentiment – this revised reading is expected to show U.S consumers remain steady without significant changes compared to the previous outcome.