The world continues to chisel away at the dollar's reserve status.
In the first of the two most recent examples of how non-western nations plan to avoid the weaponized dollar, late last week Argentina made a loan repayment to the International Monetary Fund worth the equivalent of $2.7 billion “without using dollars” on Friday, using Chinese yuan and special-drawing rights notes instead, Reuters reported.
The operation is expected to deplete Argentina's $1.65 billion in SDRs, according to a central bank source, "with yuan making up the difference." While Reuters' take home message here is that the "use of yuan underscores how desperate the country's dollar position has become", an alternative conclusion is that when it comes to international obligations - at least as far as the IMF is concerned - the yuan is as good as the greenback, an observation that will make China quite happy.
As a result of the payment, Argentina's foreign currency reserves saw a sharp decrease to around $27.933 billion for end-June, the same source told Reuters, bringing foreign reserves to their lowest since March 2016. Still, the move gave a boost to Argentina's markets on the last day of the month, which overall in June saw the stock index tick up nearly 25% and bonds up almost 13%.
Both parties are now locked in talks to speed up disbursements from their $44 billion program and ease economic targets, as a major drought continues to hammer vital grains exports.
Argentina's economy ministry said a team will travel to Washington early next week to continue negotiations.
"IMF staff and the Argentine authorities will continue to advance their work in the coming days, with the aim of reaching agreement on the fifth review of the Fund-supported program," the fund said separately on Friday, after a "standard informal Executive Board briefing on Argentina" was held Thursday.
But wait, there's more.
Indian refiners have also begun paying for some oil imports from Russia in Chinese yuan, Reuters also reported citing "sources with direct knowledge of the matter" as Western sanctions force Moscow and its customers to find alternatives to the dollar for settling payments.
In other words, it is the weaponization of the dollar that is forcing the world to find alternative to - drumroll - the dollar, something we have been warning would happen ever since Russia was effectively blacklisted and targeted by the entire dollar-based monetary platform.
And just in case there is still some confusion about the long-term viability of the petrodollar, China has also switched to the yuan for most of its energy imports from Russia, which overtook Saudi Arabia to become China's top crude supplier in the first quarter this year.
"Some refiners are paying in other currencies like yuan if banks are not willing to settle trade in dollars," said an Indian government source.
Indian Oil Corp, the country's biggest buyer of Russian crude oil, in June became the first state refiner to pay for some Russian purchases in yuan, three sources familiar with the matter said. At least two of India's three private refiners are also paying for some Russian imports in yuan, two other sources said.
According to Reuters, it could not immediately be determined how much Russian oil Indian refiners have bought with yuan, although Indian Oil has paid in yuan for multiple cargoes.
The rise in yuan payments has given a boost to Beijing's efforts to internationalise its currency, with Chinese banks promoting its use specifically for Russian oil trade.
Since the imposition of sanctions on Moscow, Indian refiners have mostly bought Russian crude from Dubai-based traders and Russian oil companies such as Rosneft, the Litasco unit of Russian oil major Lukoil, and Gazprom Neft, according to shipping data compiled by Reuters.
Indian refiners have also settled some non-dollar payments for Russian oil in the United Arab Emirates' dirham, sources have said.
"First preference is to pay in dollars but refiners sometimes pay in other currencies such as dirham and yuan when sellers ask them," said the government source, who did not elaborate further and declined to identify any Indian companies paying in yuan for Russian oil.
Reuters previously reported in March that India had asked banks and traders to avoid using the yuan to pay for Russian imports because of long-running political differences with China. And while it was not immediately clear whether recent purchases represent a change in that view, clearly this "directive" is now being ignored as US influence in the region wanes with every passing day.
Furthermore, India's imports from Russia rose to a record in May, with Russian crude oil accounting for 40% of India's overall oil imports compared with 16.5% a year earlier, denting purchases from Iraq and Saudi Arabia.
While Western sanctions against Moscow are not recognized by India and its purchases of Russian oil may not violate them, Indian banks are wary of clearing payments for such imports:
- In May, State Bank of India, the country's top lender and a key banker for state refiners, rejected IOC's planned payment in dollars for a cargo delivered by Rosneft, two sources said. The cargo was loaded on tanker NS Bora, handled by Dubai-based Sun Ship Management, an entity connected to Russia's largest state shipping company, Sovcomflot, which the European Union sanctioned in February and the United Kingdom in May.
- In June, IOC used ICICI Bank (ICBK.NS), a private-sector Indian lender, to settle this trade with Rosneft by paying in yuan to Bank of China (601988.SS), two sources with direct knowledge of the matter said. One private refiner has also been using the same mechanism for payments for Russian oil, one of the sources said.
Since then, IOC has used the same method to pay with yuan for other cargoes from Rosneft, one of the sources with direct knowledge of the matter said.
"Whenever IOC will face problems it would push for payment in yuan," the person said, adding that IOC had asked Rosneft to consider supplying oil in vessels not managed by sanctioned entities.
Another state refiner, Bharat Petroleum Corp Ltd (BPCL.NS), is also exploring yuan payment for Russian oil, a separate source said.
"Many traders (sellers) are insisting for yuan payments," the source said.
That pretty much says it all.