Pakistan has opened a yuan-denominated letter of credit (L/C) with the Bank of China to finance its first purchase of Russian oil which is expected to arrive in the last week of May.

News of the deal emerged last month (Trade-based Financial Crime, 24 April 2023), but it is significant that Pakistan has now chosen to pay Russia in Chinese yuan rather than Russian roubles or UAE dirhams.

Bank of China

The L/C has been opened with the Chinese bank for a shipment of 100,000 tons of crude oil according to sources.

They say Pakistan is buying the oil on a free-on-board (FOB) basis, while officials are reportedly surprised that the transaction is not on a cost, insurance and freight (CIF) basis.

In most cases of FOB, liability and title possession shift when the shipment leaves the point of origin. With CIF, responsibility transfers to the buyer when the goods reach the point of destination.

Why yuan?

Officials are also reportedly surprised that the transaction will be yuan because this

will put a burden on Pakistan's already severely depleted foreign exchange reserves.

With US dollars unavailable on account of sanctions imposed on Russia, Moscow had offered the option of Pakistan making payments in UAE dirham, Chinese yuan or Russian rouble. Pakistan receives UAE dirham from the emirates whereas it will have to buy the Chinese currency in US dollars.

It may be that Pakistan has been offered additional incentives from Beijing to buy the Russian oil in yuan as China pursues its strategy of weakening the US dollar's dominance in global trade.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.