India-Russia ties deepen, but those with West bigger

Sushma Ramachandran

Senior Financial Journalist

THE economic relationship between India and Russia has had its ups and downs over the years, but efforts have always been made to keep it on an even keel owing to longstanding strategic ties. In the past few decades, however, trade and investments have been subdued in sharp contrast to the days of bonhomie with the erstwhile Soviet Union. Bilateral trade, for instance, was a paltry $12 billion even as recently as 2021-22. This is largely due to greater engagement by both countries with developed economies such as the US and European Union. Even trade with China has been much higher at about $180 billion annually for Russia and about $136 billion for India.

The scenario underwent a sudden change after the Ukraine war erupted last February as global oil prices shot up to unsustainable levels for emerging economies like India. Russia, too, faced tough times with major crude oil customers cutting back on supplies to comply with sanctions imposed by the western alliance. So, India needed cheaper oil and Russia needed to find new buyers for its hydrocarbons.

The result was Russia offering oil at a discount to friendly countries like India and China. For India, it was a relief to get oil priced at $12-16 cheaper than the average price of the Indian crude basket which ruled at about $100 for most of last year. The net savings are reported to have been nearly $4 billion in 2022-23. By the end of the last fiscal, Russia had become the biggest oil supplier to this country, a considerable leap after accounting for only 1 per cent of the purchases just a year ago.

But the higher oil inflows have not been an unmixed blessing. The spurt in imports has upset the trade balance between the two countries. India is exporting only a fraction of the amount being imported from Russia, largely in the form of crude oil. The bilateral trade target of $30 billion set for 2025 has already been exceeded and reached $45 billion in 2022-23, according to External Affairs Minister S Jaishankar. But this has left a yawning trade deficit on the Indian side which is now causing concern.

The imbalance can be rapidly rectified if Russia goes ahead with plans to import goods of which its internal production fell due to the compulsions of war. In fact, there are reports that it is considering buying a range of 500 products, including cars, aircraft and trains. If so, it will not only give an impetus to domestic production but also contain the trade deficit between the two countries.

Yet, there are other irritants emerging from the higher bilateral trade flows. Another is the issue of rupee trade transactions. With western sanctions on Russia’s banking transactions preventing the use of the critical SWIFT messaging system for funds transfer, it was initially felt that the solution was to return to the old system of rupee payment. But there are problems on both sides. Since oil purchases have soared, Russian banks are reluctant to be left with large rupee deposits. Similarly, Indian oil companies are equally hesitant to carry out such sizable transactions in roubles and would be happier dealing in more easily tradable currencies.

Despite these stumbling blocks, the recent comments of visiting Russian Deputy Prime Minister Denis Manturov indicate that there are moves to deepen the economic ties even further. He referred to the resumption of talks on a free trade agreement (FTA) between India and Russia involving the Eurasian Economic Union (EEU). These were brought to a halt owing to the pandemic, but are now apparently set for revival.

As for the little-known EEU, it comprises Russia along with four other countries — Belarus, Kazakhstan, Armenia and Kyrgyzstan. It was launched in 2014 with the aim of creating a free trade area and, ultimately, improving the living standards in the region. So far, it has remained in the form of a customs union and has not moved towards a single currency like the EU.

This expansion of the economic relationship between India and Russia needs to be viewed, however, through the prism of geopolitical developments over the past year. Higher oil prices forced India to buy discounted oil from Russia despite the distance involved in freight movement. Similarly, Russia needs to tap the manufacturing capabilities in India to fill the gap in the production of core industrial goods.

These are outcomes of the Ukraine war which could continue indefinitely, given that there seems to be little hope of a negotiated settlement right now. Ultimately, however, the broader economic engagement for India will continue to be with western countries like the US and the EU which remain both its major export markets and biggest domestic investors. Ever since the liberalisation process began in 1991, business ties with developed economies in the West expanded exponentially. On a strategic level as well, India has moved closer to the US owing to the fractious relationship with China. The evolution of the Quad grouping with the US, Australia and Japan has made it evident that efforts are being made to reduce the dependence on China, especially for critical products like semiconductors.

The US, on its part, has taken a more nuanced approach than ever in the past to India's economic ties with Russia. The need to buy oil from that country is now being accepted as an economic necessity for India even though there was sharp criticism initially of this move. There is a grudging acceptance of the need for this country to adopt an independent foreign policy that keeps its eye on national interests at all costs. At the same time, it is likely that the announcement of talks for an FTA with the EEU will create some frissons in the western world which has been trying hard to isolate Russia on the economic front.

The widening economic ties between India and Russia that have emerged as a byproduct of the Ukraine war are, thus, bound to build on the strengths of the longstanding friendship between the two countries. At the same time, these are not likely to supplant the deep commercial engagement with western economies that have become integral to this country’s development over the past few decades.

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