India settles Iranian oil trades in yuan - why the shift to Chinese currency?

Indian refiners are settling payments for rare purchases of Iranian oil in Chinese yuan through ICICI Bank, Reuters has reported, citing four sources.

The transactions come under a temporary US sanctions waiver that allowed limited purchases of Iranian oil. Washington introduced 30-day waivers last month for Russian and Iranian oil bought at sea, aiming to ease prices pushed higher by the US-Israeli war on Iran.

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According to the report, Indian refiners are routing payments in yuan via ICICI Bank’s Shanghai branch to seller accounts also held in the Chinese currency. The identities of the sellers could not be determined.

Difficulties in arranging payments due to longstanding sanctions on Tehran have deterred some potential buyers, traders said.

Indian refiners have settled purchases in Chinese yuan because Iran wants payment in a currency that can bypass US-dollar sanctions channels. Iran is under US sanctions, so dollar payments for oil are difficult to route and even harder for Tehran to access.

Using yuan gives Iran a workaround: the transaction can be settled outside the dollar-based system, reducing the risk that the funds are blocked or frozen before Tehran can use them.

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Earlier this month, state-run Indian Oil Corporation bought 2 million barrels of Iranian oil - its first such purchase in seven years - aboard the very large crude carrier Jaya, in a deal valued at around $200m.

India has also allowed four vessels carrying Iranian oil to berth for Reliance Industries. One vessel, MT Felicity, has already discharged cargo, according to shipping data.

Reuters reported that Indian Oil paid about 95% of the cargo's value against the supplier's notice of readiness - a document indicating that the tanker had entered Indian waters. One source described this as “an unusual arrangement”.

Typically, Indian state-owned refiners settle payments upon delivery or discharge when dealing with oil from countries under Western sanctions.

India has been among the largest buyers of Russian oil since Moscow's 2022 invasion of Ukraine triggered wide-ranging Western sanctions. Indian refiners have also used the yuan to settle some Russian oil trades.

Indian Oil does not plan further purchases of Iranian crude, the report said. 

India had largely avoided Iranian oil imports since 2019 due to US sanctions. In that period, Chinese independent refiners - often referred to as "teapots" - have remained the primary buyers of Iran's exports.