*Ways to take Russia-India trade forward – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/todays-paper/tp-opinion/ways-to-take-russia-india-trade-forward/article65288059.ece

The Brahmos Missile System is manufactured by a joint venture between DRDO and Russia’s NPO Mashinostroyenia MOORTHY RV MOORTHY RV

The Brahmos Missile System is manufactured by a joint venture between DRDO and Russia’s NPO Mashinostroyenia MOORTHY RV MOORTHY RV | Photo Credit: R_V_Moorthy

India cannot forsake defence ties with Russia. To sidestep Western sanctions, the two nations can revisit rupee-rouble system

In many ways, India’s stance on the Russia-Ukraine conflict harks back to Cold War era when the country had remained equidistant from the two poles. India had adopted the policy of non-alignment and had made it clear that its policy stance was not one of neutrality. In fact, the non-aligned movement of which India was a prominent member, was anchored on broadly on two inter-related sets of principles; one, not to join any military alliances, and two, to pursue independent foreign and economic policies.

In pursuit of the latter, India’s post-independent political leadership established an enduring partnership with the Soviet Union, one that has withstood the travails of political and economic upheavals since the late-1980s.

Russia has remained India’s strategic partner especially on account of the military hardware it has supplied. Russia’s support is critical for India, as the latter needs a high degree of military preparedness for being in a politically volatile neighbourhood. In recent years, India-Russia defence cooperation has strengthened significantly even as India has developed “global strategic partnership” with the US under the present government in Delhi.

Arms supply

Some estimates say that almost 70 per cent of India’s ammunitions are supplied by the Russians. However, the real significance of India’s reliance on Russia can be understood by analysing the Stockholm International Peace Research Institute (SIPRI) database, one of the most reliable sources of information on military expenditure.

According to SIPRI, between 2000 and 2021, Russia’s arms sales to India were $38.3 billion, which was nearly 30 per cent of its total arms sales and the most to any country. In contrast, US’ arms sales to India during the same period was $4.8 billion, or 2.7 per cent of its total arm sales.

The NDA government has strengthened Indo-Russian military cooperation by signing 19 deals since 2015, or just under a third of all the deals concluded since 2000. Moreover, several of these deals involve joint ventures between Russian and Indian entities for production of the armaments in India, which is consistent with the NDA government’s Atmanirbhar Bharat Abhiyan.

Perhaps the most important element of India-Russia cooperation in this area has been the manufacture in India of the world’s first supersonic cruise missile system, namely BrahMos that was enabled through a joint venture between India’s Defence Research and Development Organisation and NPO Mashinostroyenia of Russia. The BrahMos missile system is set to become a key part of India’s defence exports; a $374.96 million export deal with the Philippines was concluded recently.

Although India’s commercial trade with Russia has been relatively less in value terms, it has remained important as the product basket includes several crucial products. India relies on Russia for crude oil, petroleum products and coal, besides fertilisers and sunflower seed oil. Russia has emerged as a major destination for India’s mobile phone exports and also for pharmaceutical products. Trade between the two countries is set to receive a significant boost as India is negotiating a free trade agreement with the Eurasian Economic Union of which Russia is a member.

It is possibly in view of these strategic interests defining its relationship with Russia that India has taken a measured approach vis-à-vis the Ukraine conflict. India has refused to join the sanctions imposed on Russia by its Western allies, thus signalling that its military and commercial ties will remain unaffected, at least for now.

But with the Western powers joining hands to ban the major Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunications) financial messaging system, India’s financial transactions with Russia could be severely affected. It is, therefore, imperative that the two governments find an expeditious solution, which would lend stability and certainty to the transactions between the two countries.

Alternative to SWIFT

Interestingly, there are several options from which India and Russia can choose as alternatives to the SWIFT system.

The first is to conduct business in local currencies, as the two countries did during the Cold War era. In fact, India and Russia have already made some progress in this direction by agreeing to use their national currencies in their bilateral arms deals replacing the US dollar.

In 2018, India and Russia entered into an agreement under which Russia agreed to supply five S-400 Triumf air defence systems valued at $5.2-5.6 billion, the delivery of which commenced late last year. After struggling to find an agreeable solution for India to meet its payments commitments, bypassing the American sanctions imposed under its legislation known as the Countering America’s Adversaries Through Sanctions Act (CAATSA), the two countries agreed that the mode of payment will be in Indian currency.

In the past, India had used the Rupee to settle its payments with Iran, which was also under US sanctions. Under the arrangements agreed between the two countries, payments for around 30 per cent of the crude oil that India had imported from Iran was settled in Indian Rupees, which was then used by the latter for its imports from India. The United Commercial Bank was the designated bank for undertaking rupee trade with Iran.

If Russia and India revert to the rupee-rouble trade, they would have to be mindful of the two sets of problems that were faced in the past. The first was that Russia was saddled with large rupee balances as India’s imports from Russia were significantly higher than its exports to Russia. The second problem stemmed from the steep depreciation of the rouble and given that the rupee-rouble exchange rate was fixed, India had to face an adverse impact.

In the present situation, these two problems can possibly be addressed more easily. The rupee balances with Russia can be used in the joint venture projects that are being undertaken to step up India’s domestic defence production capabilities. As regards the exchange rate issue, the two governments are likely to adopt a pragmatic approach by agreeing to a mechanism so that both countries benefit from the continuance of their defence and commercial relations.

A longer-term option for countries that are adversely affected by the Western sanctions would be the development of financial messaging systems that can be alternatives to the SWIFT. Russia has developed its own financial messaging system, the SPFS (roughly translated as System for Transfer of Financial Messages) and China has its own Cross-Border Interbank Payment System, or CIPS.

In fact, China has invited the Russians to use CIPS to bypass the Western sanctions. Although India has not yet developed its alternative to the SWIFT, the Joint Parliamentary on the Personal Data Protection Bill, 2019 had recommended that “an alternative to SWIFT payment system may be developed in India which will not only ensure privacy but will also give boost to the domestic economy”.

The writer is Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University

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