Pakistan's use of yuan to purchase Russian oil risks damaging US ties

By Zarak Khan

In a file photo, a guard performs his duty outside a currency exchange firm. [Zarak Khan]

In a file photo, a guard performs his duty outside a currency exchange firm. [Zarak Khan]

ISLAMABAD -- Pakistan's recent move to pay for Russian crude oil using Chinese currency may damage relations between Islamabad and Washington, political analysts and officials warn.

Pakistani Minister of State for Petroleum Musadik Malik said on June 13 that Islamabad paid Moscow for the discounted Russian crude oil cargo in yuan, the Chinese currency.

Pakistan on June 11 received its first shipment of Russian crude oil, a cargo of 45,000 metric tonnes, in the port city of Karachi.

Cash-strapped Pakistan is facing record inflation, fiscal imbalances and low foreign exchange reserves that barely cover a month's worth of imports.

Loans and financial agreements with China have exacerbated Pakistan's debt and made the country vulnerable to economic and political crises.

Furthermore, the purchase of Russian crude oil in yuan will likely strain ties between Islamabad and Washington, warn analysts.

"Pakistan may find it suitable or even desirable to have yuan as the currency", given the difference between yuan-rupee and dollar-rupee exchange rates, said Muhammad Shareh Qazi, a political scientist at the University of the Punjab in Lahore, in commentary May 11 on South Asian Voices, an online policy platform run by the Stimson Centre in Washington, DC.

"Pakistan may be able to extract some benefit out of these shifting global dynamics owing to its strategic tilt towards China," he added.

"However, in doing so, Pakistan is in danger of completely isolating itself from the United States," he said.

Trading in yuan will be a suicidal step for Pakistan's economy, warn some Pakistan watchers.

Pakistani-US trade in fiscal year (FY) 2022 (July 1, 2021-June 30, 2022) was recorded at $10.5 billion as compared to $7.8 billion in FY 2021, Syed Javed Ali Shah, a parliamentary secretary for the Commerce Ministry, informed parliament last December, according to Pakistan Today.

The increase year over year was 34.6%.

The US is the largest single-country importer of Pakistani products, he said.

"Islamabad should think realistically before making agreements with China, particularly conducting international business in Chinese currency," said Amjad Chawla, a Karachi-based textile exporter to the United States.

"Pakistan's embracing Chinese currency will not bring economic stability to the country. Instead, it would worsen ties with the US," he said.

"Pakistan could take advantage of strained Sino-US ties and bolster the country's export of its goods to the United States, instead of taking short-term measures to appease Beijing," he said.

Chinese currency instability

Economists have warned Islamabad about the stability of the Chinese currency, as the yuan has been falling steadily against the US dollar.

The Chinese yuan "is at the lowest against the US dollar since November amid a disappointing post-COVID economic recovery", Markets Insider reported last Wednesday (June 14).

Based on another measure, "the yuan is actually at its lowest since 2014," said the report, citing Trang Thuy Le, a foreign exchange strategist at Macquarie Group.

The usefulness of the yuan outside China is another concern.

"After the stability of China's currency, the other biggest problem is its acceptability as a global currency," said Chawla the Karachi textile exporter.

"In the global market, the US dollar, euro, and Japanese yen are the most commonly used currencies," he said.

"The US dollar is a stable currency; therefore, global traders have confidence in it," he said.

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