Representational image only. File
| Photo Credit: Reuters

Prime Minister Narendra Modi and Russian President Vladimir Putin. File
| Photo Credit: PTI

Russian President Vladimir Putin has hailed ‘Make in India’ initiative and the Prime Minister Narendra Modi-led Government’s policies, saying companies are eager to set up manufacturing facilities in India as investments are profitable.

Speaking at the 15th Vneshtorgbank (VTB) Investment Forum in Moscow on Wednesday (December 4, 2024), Mr. Putin said that the initiative, which is aimed at boosting manufacturing and attracting foreign investment, has played a key role in strengthening India’s position in the global economy.

The ‘Make in India’ initiative was launched on September 25, 2014, to facilitate investment, foster innovation, build World-class infrastructure, and make India a hub for manufacturing, design, and innovation.

Mr. Putin said that India has created stable conditions for small and medium-sized enterprises while expressing Russia’s willingness to establish manufacturing operations in India, as investments in India are profitable.

“The Prime Minister of India, and the Government of India have been creating stable-conditions and this is because the Indian leadership has been pursuing India comes first policy and we believe that investments in India are profitable,” the Russian President said.

“And we would be ready to place our manufacturing site in India. Also, the biggest investment in India in the economy to the tune of $20 billion by Rosneft happened not long ago,” he added.

Rosneft is the biggest oil producer company in the Russian Federation.

He mentioned that Russia’s import substitution programme is similar to India’s ‘Make in India’ initiative and noted that India’s leadership focused on a policy of prioritising its interests.

The president also urged for greater cooperation among Brazil, Russia, India, China, South Africa (BRICS) nations to support the growth of Small and Medium-sized Enterprises and encouraged member countries to identify key areas for collaboration at the upcoming summit in Brazil next year.

The nine-member BRICS bloc includes India, China, Russia, and Brazil.

Further, he noted the rise of new Russian brands replacing Western brands that have exited the market, noting the success of local Russian manufacturers in sectors such as, consumer goods, IT, high-tech, and agriculture.

“For us, it has special relevance as part of the import substitution programme, we see the advent of many new Russian brands substituting the brand by Western partners who have voluntarily left our market. And our local manufacturers have been quite successful not only in consumer goods but also in IT, high tech and agriculture,” he said.

He also offered to place Russian manufacturing sites in India.

India and Russia in July this year agreed to boost bilateral trade to over $100 billion by 2030 by reinvigorating investments, using national currencies for trade and increasing cooperation in sectors ranging from energy to agriculture and infrastructure.

The bilateral trade has increased to $65.42 billion in 2023-24 as against $49.4 billion in 2022-23. Trade gap is highly in the favour of Russia due to jump in crude oil imports.

From a market share of less than 1% in India’s import basket before the start of the Russia-Ukraine conflict, Russia’s share of India’s oil imports rose to over 40%.

India, the World’s third-largest crude importer after China and the United States, has been buying Russian oil that was available at a discount after some countries in the West shunned it as a means of punishing Moscow for the invasion of Ukraine.

Representational image of lawyers at the Supreme Court in New Delhi
| Photo Credit: PTI

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Oil pump jacks outside Almetyevsk in the Republic of Tatarstan, Russia on June 4, 2023.
| Photo Credit: Reuters

The story so far: As India continues to import oil from Russia, it is getting tougher for the country to pay for it. On the one hand, it faces repercussions of breaching the oil price cap of $60 a barrel put in place by the U.S. and European nations as Russia offers lower discounts on its crude. On the other hand, using currencies like the Chinese yuan for payments, which India has already started doing, has its own geopolitical ramifications amid strained ties with Beijing.

Where do oil imports from Russia stand?

Until a year ago, most of India’s oil imports came from West Asia, the U.S., and West Africa but today, a bulk of crude unloading at India’s ports is likely to be coming from Russia.

In February 2023, Russia surpassed Saudi Arabia to become the second biggest exporter of crude oil to India in FY23. Since the start of Russian President Vladimir Putin’s “special military operation” in Ukraine on February 24, 2022, Moscow has been hit by Western banking and economic sanctions. Against this backdrop, it found a ready market for its goods, especially crude oil, in India and offered steep discounts. India, meanwhile, unlike the West, chose to not join the list of countries formally imposing sanctions on Moscow.

As a result, India’s imports of crude oil from Russia increased nearly 13 times in 2022-23 to over $31 billion from less than $2.5 billion in 2021-22. Russia is now the largest supplier of oil to India, displacing traditional players such as Iraq, Saudi Arabia, and UAE. In the four-month period between November 2022 and February 2023, Russia took over the top spot from Iraq. An analysis by Reuters showed how India accounted for more than 70% of the seaborne supplies of Russian-grade oil under $60 dollars a barrel in May.

Which currency is being used for payments?

For starters, as part of war-induced sanctions on Moscow, the U.S., the EU, and the U.K. have blocked multiple Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global secure interbank system. An estimated $500 million is pending for goods already shipped by Indian exporters to Russia and it is now not possible to get the payments through the SWIFT channel.

Thus, in an effort to economically strain Russia, the West targeted one of its biggest traded goods — energy — for which transactions have traditionally been dollar-dependent. Besides an oil ban jointly agreed between multiple countries last year, it was also decided to cap the price to a maximum of $60 per barrel of Russian oil transported through waterways. While India is not a formal signatory, it has tacitly agreed to maintain the price cap as much as possible. Besides, banks and traders may not want to get involved in transactions that breach the oil cap over fears of repercussions for their funds. Until recently, the blends of oil India was importing from Russia were largely below the price cap fixed by G-7 countries and India was able to pay for the oil using dollars. However, Russia has lowered its discounts due to high demand from China and lower-grade oil is now in short supply.

Also Read Data | Russia’s exports to India rise further, trade deficit balloons

What about the rupee-rouble mechanism?

Notably, India was in negotiations with Russia to reactivate the rupee-rouble trade arrangement, which is an alternative payment mechanism to settle dues in rupees instead of dollars or euros.

However, media reports showed in May that the rupee-rouble payment mechanism could not take off. There are a couple of reasons for this — analysts point out there is scepticism on the rupee-rouble convertibility as the rouble’s value is kept up by capital controls and not determined by the market, as in the case of reserved currencies. On the flip side, Russia has also pointed out that it finds the rupee to be “volatile”.

Lastly, and more significantly, the unforeseen surge in oil trade between India and Russia in one year alone has led to a massively ballooning trade deficit. India’s trade deficit with Russia touched $43 billion in 2022-23 as it imported goods worth $49.35 billion while its exports were at $3.14 billion. This has led to staggering amounts of Indian rupees in Russian banks that cannot be used by Russia in its war efforts.

Is de-dollarisation being attempted?

Since the dollar is largely considered the global reserve currency, many countries have seen the U.S. sanctions as a way for America to weaponise the dollar. This has given rise to countries looking at de-dollarisation, which means the replacement of the U.S. dollar with other currencies as the global reserve currency.

India too, has recently released a roadmap for the internationalisation of the Indian rupee to create broader acceptance. It is important to note, however, that the value and the acceptability of any currency depend mainly on its purchasing power, that is, the number of goods and services that can be bought using it and right now, the daily average share for the rupee in the global foreign exchange market is ~1.6%, while India’s share of global goods trade is ~2%.

Meanwhile, Indian refiners have also settled some non-dollar payments for Russian oil in the Chinese yuan and the UAE dirham.

What next?

Experts have pointed out that while India could use the yuan for payments, there are concerns about how that would appear geopolitically as it continues to have strained ties with Beijing since the border standoff. Besides, another solution could be to counter the deficit with Russia by getting it to make investments in energy projects in India or to invest in government bonds.