India-Russia Trade Relationship Post Russia-Ukraine Crisis – Explained, pointwise

Introduction

The World is currently witnessing a very unpleasant situation in the Eastern European region. The Russian troops have invaded Ukraine and are advancing towards the capital city of Kyiv. The Western nations including the U.S, the UK and Germany etc. have imposed economic sanctions on Russia but they haven’t been able to stop the Russian military. These sanctions can create severe roadblocks to trade with Russia in the near future and may adversely impact India-Russia trade relationship.  

What is the history of India- Russia relations?

Russia has been a longstanding and time-tested partner for India. Development of India-Russia relations has been a key pillar of India’s foreign policy. In the Cold War era, India had signed the Indo-Soviet Treaty of Friendship and Cooperation with the USSR in August 1971, just before the onset of the Indo-Pak War in December 1971. This was a significant deviation from India’s previous position of Non-Alignment during the Cold War.

Post the Cold War era, A Declaration on the India-Russia Strategic Partnership was signed in October 2000. Since then, the ties have acquired a qualitatively new character with enhanced levels of cooperation in almost all areas of the bilateral relationship. Under the Strategic Partnership, several institutionalized dialogue mechanisms operate at both political and official levels to ensure regular interaction and follow up on cooperation activities.

During the visit of the Russian President to India in December 2010, the Strategic Partnership was elevated to the level of a “Special and Privileged Strategic Partnership”.

The 21st India- Russia summit took place in December 2021 where the leaders reiterated a Partnership for Peace, Progress and Prosperity. 

What is the current status of India-Russia Trade Relationship?

India and Russia trade in diverse sectors including defense, energy, IT, pharmaceuticals, agro-industries, mineral and metallurgy, fertilizers etc.

India-Russia trade was valued at the US$ 10.11 billion in 2019–20. Russia’s exports to India stood at US$ 6.9 billion in 2021, mainly mineral oils, fertilizers and rough diamonds. While India exported US$ 3.33 billion worth of goods to Russia in 2021, mainly pharmaceutical products, tea and coffee.

Defense business between Russia and India is booming, with contracts worth over US$ 15 billion in the pipeline.  In 2019, the Stockholm International Peace Research Institute report put Russia as India’s biggest arms supplier from 2014-18, accounting for 58% of all India’s defense imports. Russia had accounted for 76% of India’s defense imports between 2009-13.

What is happening in the Russia-Ukraine crisis?

Russia invaded Ukraine by land, air and sea on 24th February, 2022. It is the biggest attack on a European state since World War Two, prompting tens of thousands of people to flee their homes.

G7 leaders on 24th February, promised ‘devastating packages of sanctions’ on Russia.

Russian forces pressed their advance on 25th February and the Ukrainian President pleaded with the international community to help the nation.

The U.S on 25th February announced that exports of nearly all US items and items produced in foreign countries using certain US-origin software, technology or equipment will be restricted to targeted military end-users. Thereby making defense deals with Russia even more difficult.

Other European nations including Britain and Germany have also imposed significant economic sanctions on Russia. These sanctions impede Russia’s ability to do business in major currencies and target individual banks and state-owned enterprises. This will impact India-Russia Trade Relationship.

How the deepening of the crisis would impact India-Russia Trade Relationship?

Defense Roadblocks: There would be negligible possibility of getting a waiver from the U.S under the CAATSA Act for purchasing S-400 defense system from Russia. The act mandates sanctions against countries that engage in “significant transactions” with Russian, Iranian and North Korean defense and intelligence entities.

Farming Sector constraints: Vital supplies of fertilizers from Russia could be disrupted as sanctions intensify, threatening India’s vast farm sector. Russia and Belarus usually account for nearly a third of India’s total potash imports which is a key ingredient of fertilizers.

Stalemate to joint projects: India, Russia and Ukraine have a $3 billion contract for the purchase of Russian Krivak-III frigates. 

With some difficulty, New Delhi had negotiated an arrangement that required India to buy the Zorya turbines from Ukraine and transport them to Yantar Shipyard, Russia. From here they would be installed on the two Krivak-III frigates and then sailed to India. Ukraine is now highly unlikely to supply the Zorya turbines to Russia. 

Concerns for Steel sector: India-Russia collaboration in the mining and steel sector would be undermined with deepening of the crisis. The collaboration would have given India an advantage in terms of pricing for domestic steel makers and assured supplies of one of the most critical inputs(coking coal) that accounts for 40% of the total cost of production of steel. 

Difficulty in managing the Pandemic: A new wave might emerge in future and sanctions could create impediments in cooperation. India supplied critical medicines, including hydroxychloroquine during the first wave in Russia. Similarly, Russia provided ventilators, oxygen concentrators and other critical equipment during India’s second wave.

Hit to Nuclear energy:  In Dec 2014, DAE and Russia’s Rosatom signed the Strategic Vision for strengthening cooperation in peaceful uses of atomic energy. Kudankulam Nuclear Power Plant (KKNPP) is being built in India with Russian cooperation. Its progress may get hindered post the crisis.    

Undermining the potential of regional groupings: A rise in the magnitude of sanctions on Russia would reduce intra-member trading potential in groupings like BRICS, Shanghai Cooperation Organization etc. Further negotiations on fostering a trade agreement between India and The Eurasian Economic Union may get stalled. 

Breach of Targets: The countries have a target of increasing bilateral investment to US$ 50 billion and bilateral trade to US$ 30 billion by 2025. However it may not be achieved considering the ongoing crisis and the sanctions.

What are the options for India?

First, India without taking any sides should take proactive steps for bringing an immediate end to violence as it brutally undermines both letter and spirit of International law.

Second,  India should set up a rupee payment mechanism for trade with Russia to soften the blow of Western sanctions on Russia. Under this, the plan is to get Russian banks and companies to open accounts with a few state-run banks in India for trade settlement. India had also used it with Iran after it came under Western sanctions for its nuclear weapons programme.

Third, India must leverage platforms like 2+2 dialogue for crafting a sustainable course of engagement with Russia in the future.

Fourth, India should look for alternatives in place of Russia and reduce its high degree of dependence in sectors like defense and energy. This is desired considering the uncertainty of the situation and high probability of even stricter sanctions by the western nations in future. For instance, in the case of coking coal, focus should be on Australia, Brazil and other Central Asian countries.

Conclusion

The Ukraine-Russia episode shows the dwindling pace of international law and loss of respect towards the sovereignty and integrity of nations. Hence there is a dire need for the world leaders to come together and realize the core objective of the UN’s preamble that places a duty to save succeeding generations from scourge of war. As an incumbent member of the UNSC, India must push for brining the hostilities to an immediate end. At the same time, India should take proactive steps to hedge its interests amid the uncertainties.