Convenient payment options may be helpful in clinching a few deals.

Prima facie, there exist several complementarities at this juncture for growing trade between India and Russia. Many of these, however, have cropped up because of the supply-disruptions caused by the ongoing Russian actions in Ukraine and the intensifying financial, trade and political sanctions imposed by G7 and G22 nations as reprisals. While there is no warranted justification for war, and no price ever worth the human suffering it causes, the war in Europe will end some day and so will the restrictions and prohibitions. Widening of the bilateral economic relations between Russia and India must reckon with this inevitable, but highly warranted eventuality. The sooner this happens, the quicker the return to normalcy; with the world getting back to addressing the immediate, as well as longer term aspirations of its inhabitants.
Reckon with the post war situation.
Post the Ukraine war, and the stringent economic counter measures, there will be several material changes that will last for quite some time. For start, the assiduously built prosperity of Russia and Ukraine in particular, would have been perceptibly damaged. After suffering incessantly day and night from aerial bombings and never before witnessed missile-hits, the much smaller, but brave Ukraine will find its economy in tatters. Citizens would remain psychologically shell-shocked, with extensive casualties and injuries. Whenever somewhat recovered from that unfortunate state, their efforts and resources would be rightfully directed at rebuilding their families, homes, infrastructure, and possible vocations.
Till a few weeks before the Russian invasion, Ukraine was virtually the granary of the world, amply growing and exporting wheat, corn, sunflower and a host of other food and commercial crops. It extracted and processed some of the most valuable ores and minerals, as well as manufactured, both simple and complex industrial products. It supplied almost one half of the neon gas required for manufacturing the fast-becoming scarce semiconductors, reactors and other equipment needed for nuclear power facilities, and turbines for hydro generation. With its vast base of well trained and motivated scientists and technicians, it served as East Europe’s hub of technological and design capabilities in the bygone Soviet era. Though fabricated by the metal-manufacturers of Leningrad in Russia (now called St. Petersburg), many of the Soviet Union assisted heavy engineering industries and hydro power stations in India had their designs conceptualized in Ukraine. Post the horrific war, such capabilities would have been damaged beyond repair, with the ongoing trade worth billions of dollars hitting its nadir. Trading partners would need to scramble to find alternate sources at comparable prices, quantities and other commercial terms.
Given the agro-climatic and geological similarities between Ukraine and the nearby regions of Russia, as well as the Soviet era interdependence in manufacturing between the two countries, Russia, ironically, becomes the first place to look at as an alternate source. Several “natural” commodities are available in Russia, and except for the hydrocarbon deposits in its eastern region viz. Siberia, they serve as “doable” substitutes with the Russian ports being available on the Black Sea (and the Siberian ports for oil and gas). Ukraine was shipping much out of Mariupol, the unlucky city currently being battered beyond recognition, as well as from ports under attack in its Odesa region. It is not surprising that along with deep discounts in prices, the Russian authorities are now putting on the table offers that include freight and insurance with assured delivery at the designated destinations of importers.
Except armaments and ammunition, when it comes to “industrials”, Russia has not been a strong source of exports. Its high-tech producers have lost ground to the suppliers of the West and the country itself has become dependent on western exports for sophisticated products and services. Its own war-linked requirements of such manufactures, especially components, will now vastly escalate. With economic sanctions in place and its foreign reserves in overseas banks frozen, its capacity to ramp up production for additional exports and service those already supplied, stands severely impaired.
Such considerations make it imperative for India to shape its long-term trade options in a fashion altogether different from mere short-term measures. In the Russian context, this means the switchover in trade should be limited largely to commodities and just a handful of related manufactured goods or services. India’s policy must reflect a clear distinction between a longer-term strategic stance and merely cashing in on the current opportunities. This will also help it with giving satisfactory answers to the growing number of questions it faces on its independent stand on the Russian invasion. This includes appeasing its own partners in the Quad grouping, as well as dealing with President Joe Biden, who has questioned India’s position on Russia.
What seems to be currently helping India take an offbeat international position is that the United States’ own allies and senior NATO partners, viz Germany, France and UK have continued with Russian natural gas supplies. Alongside, the rest of the EU too has expressed its inability to put a stop to the Russian crude oil shipments earlier than 2027. Unlike the US, West European nations have not sanctioned any of the Russian banks for hydrocarbon trade. In a similar vein, if the relevant terms of trade are favourable, India too could justify its Russian buying of crude oil, natural gas, fertilisers, sunflower oil, diamonds and defence equipment. However, since uncertainty persists about these Russian supplies and the accompanying high volatility in prices could remain for a while, India would do well to bind the Russian side to medium term contracts of 3 to 5 years, wherever it is in its own interest. This would help bring about much needed stability in its national fiscal math, inflation levels and foreign exchange reserves, besides ensuring the continued flow of defence related goods and services.
Whether similar arrangements should be entered into with Russia over the longer term would depend as much upon Russia, its post Ukraine geopolitical standing, and the future state of its economy. For its actions in Ukraine, it could well find itself being globally mistrusted and isolated for years to come. India, too, would need to reckon with a host of its own dilemmas. This would, inter alia, include whether it could continue to rely on a defence partnership with Russia given the likelihood of Russia and China’s growing proximity, India’s progress with renewable energy and green hydrogen (both of which could become feasible sources of energy in the not too distant future in lieu of the extant pervasiveness of fossil and hydrocarbon fuels), and trends towards a return to natural farming and the popularization of nano-fertilisers. Equally consequential would be the degree of success India achieves in the highly emphasised Atmanirbharata (self sufficiency) campaigns for domestic manufacturing.
Beyond these dynamics, there are several other imponderables as well which make it difficult to take a realistic long-term view. This includes the US taking a call to extract more of its known reserves of oil and gas, including shale. That would not only mean it imports less but in fact becomes a major exporter of hydrocarbons. Breakthroughs are also possible in technologies which would drastically reduce the fuel requirement in transportation—these include production of lighter batteries with more storage, and the replacement of metals in automobiles with lighter and longer lasting alloys and plastics. Given these potential future developments, and the vast geopolitical uncertainties ahead, undertaking a long-term trade exercise would demand a much firmer line of sight into the future, which at this point is an unrealistic expectation.

WEIGHING POSSIBLE PAYMENT OPTIONS
Even for short term trade with Russia in a few commodities such as crude oil, natural gas and diamonds, and in low technology items such as fertilisers and sunflower based edible oil, a critical determinant would be the mode of payment. While Russia, understandably, would prefer payment in a hard currency to enable it to import essentials, India’s preferred option would be to pay in Indian Rupees (INR). The latter would be along the lines of the Rouble-Rupee trade that was in vogue for almost three decades; first in the days of the Soviet Union, and then continued for a few years with Russia. During this time, India paid for all its imports in INR in a designated bank (the Russian Bank in turn paid its exporters in local roubles) with Russian importers paying for Indian exports, consisting primarily of tobacco, tea, textiles and light engineering products, in roubles, while the Indian exporters got paid in INR from the designated banks. The fact that Indian imports invariably exceeded Russian imports meant Russia had built a large surplus of INRs. These were settled when the rouble-rupee trade was stopped in mid 90s through another of its munificence to India. At that time, the Russians took back a part of it in dollars while writing off the rest.
India can also press upon the Russians to accept a mutually beneficial mode of payment for the enhanced trade in commodities by playing up the recent Iranian offer of resuming the barter like trade between the two countries. Due to US sanctions, for it threatening to become a nuclear power, Iran could not be paid by any country in dollars or another hard currency. The new Iranian offer accepting INR for the sale of crude oil and gas is similar in many ways to the available offers from Russia. It comes with deep discounts on price and deliveries and is on a c.i.f. basis at an Indian port. Also, since Iranian crude is somewhat sweeter and lighter, it is more amenable to being refined at all Indian refineries, especially the older ones. Equally significant, unlike the Russian offer, the Iranian discount is for a long-term trade arrangement and is not limited to specific transactions. It also does not suggest the use of an external benchmark currency (such as the Chinese yuan proposed by Russia) to fix the values of respective currencies, viz., Iranian rial and INR.
In any case, as of now India does not have any insurmountable difficulty in importing more hydrocarbons from Russia. With European nations not imposing sanctions on any Russian bank for trade in crude and gas, India has the option to buy these through a European based intermediary. Last week, two small lots of Russian crude for May delivery were purchased by IOC and HPCL through M/s Vitol, a German trader. When asked about this, the White House spokesperson Jen Psaki agreed that these were not violative of the sanctions; though she did rather caustically observe that the “world’s largest democracy might find itself on the wrong side of history” and to “think about where you want to stand when the history books are written”.
Another option that also continues to be available to India is to effect the commodity purchases through the unsanctioned Russian banks. Hitherto, only 8 large banks have been sanctioned by the US. There are several large and regional banks available to undertake the trade, as well as numerous small Russian banks that have not brought under sanctions by US, EU or UK, though their credentials would need to be carefully verified.
Trading in NDF (non deliverable forward) markets, a recent derivative instrument for trading in non-convertible or restricted currencies, is also a possible option. Their usage does not entail the physical exchange of money, except to the extent of the difference between the NDF rate and the spot market rate. Only the differential quantum of payment is required to be effected in an agreed convertible currency with such transactions commonly going through intermediaries in an offshore centre. Before going down this route, Indian traders, however, might like to get prior clearances from RBI.

TEMPERING TRADE WITH REALISM
India stands to risk much of its recently built geopolitical capital and goodwill with the West, particularly the US, if it is not careful with its trade engagements with Russia. After the term of the somewhat mercurial Donald Trump, over the last few months US leadership has stood with India on important issues at multilateral and bilateral fora. In recent years, US has also emerged as a major supplier of high technology products, vital for use by Indian industrial and military establishment. It is an important ally of India in checking the Chinese designs in the Indo-Pacific, as well as our own Himalayan borders. Making Quad an effective alliance in the region, will undoubtedly depend on the stance and role of the US.
In more practical terms, India must remain cognizant of the fact that finished products coming from the US and other industrialised nations enjoy a reputation of greater reliability and efficiency than comparable Russian items. Past experience has shown a better adherence by such nations to delivery schedules and the contracted prices, especially in supplies of advanced fighter aircrafts, submarines and nuclear power facilities. Such considerations, however, apply less to natural, raw or barely processed products. Short-term trade in these could be pursued with Russia in order to make the most of the situation. Even for these, India should leverage all alternate options around the world for much needed commodities and decide on the basis of relevant considerations such as quantity, quality, price, delivery conditions, duration of contracts and terms of payment.
While some call for rapid deal-making, in this case, it would be prudent for India to move in baby steps. In particular, every new segment of its business with Russia and every agreement that has longer term implications, must be carefully thought through and be exhaustively justified to be explicitly in its self-interest. As a relatively less well-off nation with formidable issues confronting it, we must remain cognizant that it is in our good to have decision-makers, free media and the open markets around the world remaining benign to India. Let there be little doubt that we need all their support to survive and progress in the uncertain years ahead.
Dr Ajay Dua, a development economist by training, is a former Union Secretary, Commerce & Industry.