According to three government officials engaged in policymaking and two banking sources, India has requested banks and merchants refrain from using Chinese yuan to pay for Russian goods due to long-standing political problems with its neighbor.

India would prefer to settle trade in United Arab Emirates dirhams, according to three government sources, as it has become a major consumer of Russian oil as well as cheap coal.

One of the directly engaged government officials stated that although payment in dirham is “acceptable,” New Delhi is “not happy” with settlement in yuan.

The second official stated that unless the ties between the two nations improve, India cannot permit payment in yuan.

Since 2021, thousands of Indian and Chinese soldiers have been engaged in a stalemate along their disputed Himalayan frontier, which has soured the whole relationship.

The five representatives remained silent when asked if India’s resistance to accepting yuan settlement was also due to economic factors.

After violent border confrontations in the isolated Galwan Valley of Ladakh in 2020, ties between India and China have worsened. That year, the country’s largest cement manufacturer, UltraTech Cement, used Chinese yuan to purchase a cargo of Russian coal.

Following the UltraTech purchase, the government assessed the matter with central bank officials and bank executives, the second official claimed.

The Reserve Bank of India (RBI) is not enthusiastic about international trade settlements in yuan, according to two financial officials who are aware of the situation. They also revealed that the government has discouraged them from using the currency.

They said that Russia was enthusiastic about the yuan settlement since it facilitates their acquisition of Chinese goods.

Payments have been handled in part by the State Bank of India through its nostro rouble account in Russia for Indian refiners, who recently began paying certain Russian oil imports in roubles, according to Reuters.

Nevertheless, as the rouble is only partially convertible and the two nations have not yet agreed on a framework, the majority of trade is still conducted in other currencies.

According to the first official, in the upcoming months, the government anticipates making the majority of its payments to Russia in dirhams.

India has avoided criticizing the Ukrainian conflict, which Moscow refers to as a “special military operation,” due to its long-standing political and security relations with Russia.

Russian weapons are also widely purchased by India.

Refiners in India have been purchasing Russian oil from Dubai-based traders instead of paying in dollars, according to Reuters.

The rupee of India is only partly convertible, making it a less desirable reserve currency for international central banks and for doing business since it must first be changed into U.S. dollars.

Moreover, it makes Russia wary of accepting Indian rupees as payment for its products.