How significant is India's first ever use of rupees for UAE oil payment? - Al-Monitor

How significant is India's first ever use of rupees for UAE oil payment? - Al-Monitor: Independent, trusted coverage of the Middle East

DUBAI — The United Arab Emirates and India settled this week their first oil transaction using rupees, as India’s top refiner, Indian Oil Corp., bought a million barrels from the Gulf country.

Abu Dhabi National Oil Company (ADNOC) received the rupee payment of an undisclosed amount from Indian Oil Corp., according to an Indian Embassy statement acquired by Reuters on Monday.

Last month, the two countries agreed during Indian Prime Minister Narendra Modi's visit to Abu Dhabi, to settle bilateral trade in rupees instead of dollars, increasing India's ability to cut transaction costs by eliminating dollar conversions.

Earlier in March, the UAE Central Bank began implementing its digital dirham strategy following a financial cooperation agreement with India the year before. Using digital currencies, UAE-India transactions can bypass the need and expense of converting to an intermediary currency such as the dollar.

Mohammed Soliman, senior fellow at the Middle East Institute in Washington, said such developments are a reflection of the UAE and India’s growing economic partnership.

“Both countries benefit from reduced dependence on a third-party currency, potentially lowering exchange rate risks and transaction costs,” he told Al-Monitor in a written statement about the two countries, which saw bilateral trade reach $84.5 billion from last year to 2023, according to Reuters.

“It also reflects a broad willingness to diversify away from the dollar-dominated trade,” said Soliman, “and might encourage other nations to explore similar alternatives.” The development showcases an overall shift in how countries are approaching bilateral trade, and it will potentially prompt discussions about the economic and geopolitical implications among nations involved, he added.

Less problematic for US than China

When he met with Gulf leaders in December of last year in Riyadh, Chinese President Xi Jinping said his country, the world’s second-largest economy, would push for yuan-settled oil and gas trade.

A few months later, China conducted the first-ever yuan-settled energy deal involving some 65,000 tons of Emirati liquified natural gas in March of 2023. The transaction was carried out by China National Offshore Oil Corporation and France's TotalEnergies through the Shanghai Petroleum and Natural Gas Exchange.

While the Biden administration has regularly expressed discontent about China’s growing economic influence in the region, Soliman said the United States has shown support for a growing relationship between India and the UAE.

This was demonstrated by the establishment in 2021 of the I2U2 Group — the United States, India, the UAE and Israel — to conduct joint investments in water, energy, transportation, space, health and food security, he said.

“India's engagement in the Middle East is a welcome move, and this is further supported by the US, as evidenced by the I2U2 initiative,” said Soliman.

The I2U2 bloc is in line with the Biden administration’s goal to implement the 2022 US Indo-Pacific Strategy, which aims to reframe US engagement with the Middle East and West Asia and reduce China’s influence in the Indo-Pacific, according to the Middle East Institute's 2022 report "The US and the I2U2: Cross-Bracing Partnerships Across the Indo-Pacific."