The emerging complementarities need to be actioned.
No war can ever be justified. This was true in the past, and perhaps is even more valid today. In fact, the greater lethality, longer reach and the more pervasive capabilities of modern weapons—especially nuclear and chemical—now call for altogether eschewing it. The civilised world needs to give up on armed conflict as a possible option to settle disputes and differences of varying intensities. After all, none of the causes of the wars over the last hundred years, including the two prolonged World Wars, could be resolved on a lasting basis. A year after the Second World War ended in 1945, leaders of the warring European nations who were on opposite sides during the 6-year-long bloody confrontation, were mingling with one another as they explored collaboration in political, military, and economic matters. To demonstrate that the human race has evolved, and is different from the animal species, incursions across borders need to be declared illegal and unacceptable under all relevant international laws and dispensations. Simply put, war is not the answer.
Be that as it may, we now must face the current reality. The world has a situation at hand where a militarily powerful Russia has invaded Ukraine, another independent nation for causes which have only limited validity. Day after day, Russia continues to uninhibitedly pummel everything in its way to make the weaker Ukraine surrender. Making such an observation in no way exonerates the West led by the United States for its role in provoking this horrible event. Ever since the breakup of the Soviet Union in 1990, the leaders of the so called “free world” have been gradually moving eastwards through the extension of NATO, their military alliance. In an effort to check their further advancement to its borders, Russia opted for the aggressive response now being helplessly witnessed. In turn, by way of reprisal, a string of severe economic, trade and political sanctions have been levied on the country. Such imputative measures are likely to persist till the Russian economy collapses and virtually comes down on its knees. With a stuttering war at hand, and dire economic prospects ahead, the million-dollar question confronting President Vladimir Putin could soon well be “was it all worth it?”
A few weeks of modern war, like the one being fought, could bleed the fragile Russian economy for a long time. A reliable set of professionals estimate that each day of the ongoing war, directly and indirectly, costs a mind boggling US$20 bn. They suggest a month-long war could lower Russia’s GDP by a staggering 8% and cause an inflation of 20%. The impaired banking and capital flows across border through the blocking of SWIFT, combined with blocked payments through Mastercard, Visa and American Express, have begun to wreak havoc. Consumer prices have escalated and long queues for consumer and other essentials are back. The situation will only worsen as G-7 nations have recently snapped all their trade ties with Russia. 300 large western companies have suspended their manufacturing and retailing operations in Russia. Such measures could hugely affect employment, wages and living standards. In a matter of weeks, Russia, an otherwise trade surplus country, would find itself barely able to pay for essential imports. The eventuality of its overseas debt-defaults could begin to materialize with the cost of insurance against it almost doubling. To protect the average Russian from deep economic suffering, a series of insulation measures seem to be imperative.
Countries like India, which have hitherto consciously taken a middle of the road geo-political stand and not publicly condemned Russia for its armed intrusion, find themselves in a precarious position because of the international economic chaos brought about by the Ukraine war. Policy leaders in India are well aware that while global pressure mounts, India remains a developing country with vast unmet needs and the priority has to remain putting the best interests of its citizens above all. This is most visible in their trade and fiscal fronts. India’s overseas dependence for energy, fertilisers, edible oils, pharmaceutical ingredients, and capital goods, along with defence equipment, already causes an annual trade deficit of about $150 bn; this might soon slip beyond the $200 bn mark and reach 50% of the country’s recovering exports. While the conflict may have opened up a few temporary opportunities to step up the export of wheat, corn, steel, aluminium etc, the incremental Indian imports are likely to far exceed the delta in exports. Fortuitously, several of India’s growing imports and Russia’s common exports may find resonance in one another.
EXPLORING & BUILDING COMPLEMENTARITIES
In exploring the realistic complementarities between India and Russia, it is worthwhile to recall the past bilateral relationships. Many a times, these have been driven more by strategic considerations rather than commercial or immediate benefits. Bilateral trade preferences including a Rupee payment mechanism were in position during the Soviet era. It has been a long-standing practice to hold periodic reviews at different tiers of government, including heads of governments, on a whole host of mutual interests. Extending geo-political support to one another at multilateral fora including the important Security Council of the UN has been the unwritten norm. India’s recent support on the Ukraine war at the Security Council, General Assembly and the UN Human Rights Commission is another manifestation of such mutual alignment.
CRUDE OIL & NATURAL GAS
Given its precarious foreign exchange situation and excessive dependence on crude oil and natural gas, the foremost concern for Russia is finding alternate markets to the countries of the West. In addition to being the top gas exporter, Russia is the third largest producer of oil and its second biggest exporter. As an effective ingredient of their trade sanctions, the US has prohibited trade with it in hydrocarbons, while the EU and UK have opted for gradual reductions. President Biden has also barred Americans from directly investing or participating in other foreign investments flowing into its energy sector.
The consequent soaring of global crude oil prices is adversely affecting India’s fiscal math and impacting its fledgling recovery, besides pushing up the already high inflation rate. India’s fuel imports form 32% of its import bill, a number higher than any other major country. Hydrocarbons constitute over four-fifths of such imports. A $10 per barrel price escalation swells the annual oil import bill by $8-9 bn. A price rise in the $60-$90 bracket lowers GDP growth by 30 basis points, while an increase above $90 a barrel could imply a GDP loss as high as 90 bps.
Given these dynamics, growing hydrocarbon trade is in mutual interest. Quick finalization of a deal between Indian Oil Corporation and a Russian party for purchase of 3mn barrels at a 25-30% discount on the dated Brent rate is an indication. The concerned ministers on both sides have established contacts and there should be renewed enthusiasm to find suitable arrangements. India could use this opportunity to tie up the alternate sources on a long-term basis at desirable, pre-determined price-ranges. By offering Russia, which incidentally supplied 20 mn barrels per month to US, a long-term contract for twice or even three times that quantity and for several years, India should be in a position to leverage higher price discounts. Also given the emerging difficulties in shipping, the new Russian contracts need to be preferably on a delivered basis to an Indian port. In the just concluded small transaction with IOC, the Russian supplier has taken such a responsibility.
There is a strong case to increase the oil share from Russia, from a paltry 3.6 mt or 2% of the total 176 mt imported between April ’21-January ’22, to at least 5%. Unsurprisingly, the Russian government has also invited Indian companies to invest more in Russian oil assets. Such tilting in India’s favour needs to be capitalised. Whereas earlier, Indian firms had to compete and pay a high premium for even minor stakes in the Sakhalin and well-endowed East Siberian reserves, today, the rich Arctic 2 oil assets and pipeline are being offered for partnership by its two large oil-conglomerates. Due nimbleness in negotiating the new contracts has to be demonstrated by India, lest China, the world’s largest oil importer steps in and makes offers the Russians can’t refuse in the prevailing geo-political situation.
CHEMICAL FERTILISERS
A long-term understanding on fuels could also be extended to chemical fertilisers. India imports 25% of its requirement of urea, 90% of phosphates and 100% of potash needed for production of diammonium phosphate (DAP) and muriate of potash (MOP) from Russia, Ukraine and Belarus. These three countries together accounted for a third of the global trade in fertilisers. Most of India’s urea comes from China. With disruptions in East European shipments and China cutting down urea exports to India, there looms unprecedented uncertainty and fluidity in fertiliser prices. Both the import and the domestic subsidy bills are enlarging sharply. Driven primarily by a significant DAP price increase, the subsidy bill on fertilisers for the current year had to be revised upwards by 60% to Rs 1.4 trillion and the total for next year would be far north of the budgeted Rs 1.05 tr. Currently at $14-$15/mmbtu, the Indian pooled gas rates could go past $18/mmbtu. A $1 increase in gas prices increases the urea subsidy bill by Rs 5,000 crores.
Such developments strengthen the case for signing three-year contracts with the Russian manufacturers for both DAP and NPK based complex fertilisers. The Indian requirement for imported urea may not be significant beyond 2025 since 3 domestic manufacturing units of a capacity of 1.27 mt each—at Ramagundam (Telengana), Sindri (Jharkhand) and Barauni (Bihar)—soon go into commercial production. With the two recently added private facilities, the installed capacity for urea production would reach 31mt, close to the aggregate demand of 33 mt. The current emphasis on nano fertilisers and natural farming could help bridge this small gap.
EDIBLE OILS, TOBACCO AND TEA
Another critical Indian purchase from Ukraine and Russia has been sunflower oil. With a significant gap between consumption-demand of edible oils in India of 25 mtpa and domestic production of 12 mt, India remains the largest global edible oil importer. Palm oil imports in 2019-20 constituted about 60%, soyabean 25% and sunflower oil was 12% of aggregate. For its imports of 13.35 mt of such oil, India had paid an equivalent of Rs 62,000 crore. Currently, the sunflower oil imports are 2.5 mtpa. With the extensive disruptions in Ukraine, the Indian requirement for alternate sources has accentuated. Indonesia, the largest palm oil exporter, has imposed restrictions on its increased exports. There are logistical difficulties and sharp price impacts in importing additional quantities of sunflower oil from the farther off Brazil and Argentina. Prima facie under the emerging scenario, a better option is to turn to Russia for increased sunflower oil. In return, India could offer more tobacco and tea, both of which Russia has hitherto been buying and reportedly has headroom for additional.
DIAMONDS, GOLD AND OTHER MINERALS
The well-developed Indian gems and jewellery industry is also dependent on imports from Russia, both for gold and rough diamonds. Keeping this highly labour-intensive export industry going is important for India to earn foreign exchange as well maintain domestic employment. Of late, prices of gold have risen sharply, and the rupee depreciation has made the imports expensive. With trade in this traditional area being impacted, it may be an opportune time to get the Russian government involved in minimising disruptions.
The Russian partly state-owned diamond mining company Alroso is one of the world’s biggest producers with 30% of global diamond output. In exchange for a long term supply arrangement for selling to it rough diamonds, India could offer reciprocal long term facilities for diamond cutting and polishing. At present, India imports about 10% of it directly but nevertheless ends up processing most Russian diamonds. Similarly, for certain metals and minerals coming from Russia, viz., valuable nickel for batteries and other industrial usages, hard coke for steel making, and several rare earths like palladium, there is room for deal making with government owned and other mining entities.
DEFENCE EQUIPMENT
Perhaps, the most important of all areas of increased collaboration, remains the national security matter of actioning the strategic partnership in defence. Despite some recent progress in indigenization, India remains the world’s biggest importer of arms. For a decade between 2012 and 2021, Russia, with a 46% share, was its biggest arms supplier as per Sipri, a reliable Swedish research Institute in this field. Despite a 21% decrease during the 2016-2021 period, with France gaining due to the orders for Rafale fighter jets and anti-tank guided missiles, Russia maintains its pole position. India, no doubt, had in recent years signed up with Russia for expensive equipment such as S-400 air defence systems, frigates for Navy, light utility helicopters, short range air defence systems and additional fighter jets; but for some reason or the other, these have got shelved.
The war in Ukraine would potentially further affect the supply of equipment, spares and services for several of the armaments purchased in the last few decades. Another matter of concern is that while the Russian arm exports to India have declined in recent years, its supplies to China have gone up by 60%. India will have to deftly balance these dynamics and look to see if there is an opportunity to secure special treatment from Russia to commit additional arms-supplies for ensuring the preparedness of its armed forces. In the light of the Russian march into Ukraine, several European nations are likely to undertake a massive re-armament exercise. With the US likely to be their major supplier, a rapid change in global arms flows may be expected. India would do well to re-prioritise its strategic interests.
Dr Ajay Dua, a development economist by training, is a former Union Secretary, Industry and Commerce.
Part 2 of this article, focusing on the need for devising new payment mechanisms, including a rouble-rupee exchange to finance the increased trade with Russia, will appear next Sunday