Russo-Indian Economic Ties During Wartime: Oil, Currency and the Arctic

Following the launch Russia’s all-out war of aggression against Ukraine and growing international economic-political isolation, the Kremlin’s contacts with major regional and international powers have shrunk to three primary players: China, India and Turkey. Specifically, current and prospective ties are being cultivated between Moscow and New Delhi in the realm of economic and business cooperation. Overall, Russia and India are considering the use of national currencies in bilateral trade, India`s future moves in the trade of non-renewable energy resources and cooperation in the Arctic.

To begin with, Moscow and New Delhi have been discussing using their respective national currencies in bilateral trade. On December 21, 2022, Zamir Kabulov, Russia’s special representative to Afghanistan and director of the Second Asia Department at the Foreign Ministry, solemnly stated that Russia and India had rejected the use of the US dollar and the euro for trade arrangements between the two sides (Vedomosti, December 21, 2022). Later, it was reported that at least six Russian banks—including Sberbank and VTB—received permission to open special accounts in India’s financial institutions, including the Reserve Bank of India. This move allows the Russian entities to make direct transactions for Indian goods in rupees (Kommersant, December 13, 2022). Presented by mainstream Russian experts and information outlets as an undisputed success, the value of this move may be seriously undermined by three main factors: an extremely low trade dynamic between both countries, a visible imbalance in bilateral trade, as well as challenges related to the use of the Indian rupee.

Regarding the first factor, in 2021, the volume of bilateral trade between Russian and India came to a mere $11 billion, while trade between the United States and India for the year totaled $119 billion (Kommersant, December 12, 2022). Indeed, in 2022, the Indian-Russian trade balance grew; yet, this mainly resulted from India’s skyrocketing purchases of Russian oil at a huge discount. In the future, the importance of this pillar could be challenged, as India may in fact reduce its imports of Russian oil. This would most likely happen if the price goes back up—and Moscow refuses to grant New Delhi a special discount.

As for the second factor—the significant trade imbalance—in the first nine months of 2022, the volume of Russian goods purchased by India came to $28 billion. However, in the reverse direction—Russia purchasing Indian goods—the total was a measly $2.3 billion, 14-percent less than the previous year. As noted by Mikhail Zadornov, chairman of the management board of Otkritie FC Bank, “We [Russia] do not have any goods that we can import from China and especially India compared to the volumes of oil, gas and oil products destined for these countries” (RBC, January 5).

Furthermore, experts note that the use of the Indian rupee—which has lost more than 10 percent against the US dollar and 25 percent against the ruble in value—in trade between Moscow and New Delhi poses one major strategic challenge: Namely, it will be problematic for Russia to deal with the oversupply of rupees that it is set to receive for its raw materials, especially given the aforementioned trade imbalance (Nezavisimaya gazeta, December 12, 2022). In a related comment, Alexey Zakharov of the Moscow-headquartered National Research University Higher School of Economics also noted that the massive trade imbalance—which is unlikely to disappear—reveals the actual interest of Indian businesses in the Russian market. Zakharov added that the idea of India prospectively turning into Russia’s “hub for parallel import” looks more like “Russia’s dreams” rather than a potential reality. In fact, India is seriously concerned with the prospect of secondary Western sanctions and, as such, is unlikely to jeopardize its ties with the United States and the European Union (Nezavisimaya gazeta, December 12, 2022).

Beyond currency considerations for trade, Russia and India have also been locked in discussions on the trade of hydrocarbons. Economic sanctions have reduced Russia`s oil exports, with the resulting increased export flows to India making the country the top destination for Russian oil exports in 2022. This, however, came at a price: Russia had to sell its oil at a huge discount—reportedly at $38 per barrel (The Insider, December 29, 2022)—which “put Russia’s oil producers on the brink of economic unsustainability” (The Moscow Times, November 29, 2022). The real challenge for Russia is that India is likely to only continue purchasing these exports at such a high volume so long as the discounted rate remains intact. In fact, according to Indian sources, New Delhi is allegedly considering joining the price cap on Russian oil if its price exceeds $60 per barrel or if the EU decides to impose blanket secondary sanctions on countries purchasing Russian oil (Telegraphindia.com, January 10). Talks about joining the price cap started to circulate in India back in September 2022; yet, according to an unnamed government official, their practical realization was contingent on the establishment of alternative supplies from Venezuela and Iran (The Economic Times, September 6, 2022).

Finally, India and Russia have been looking for options to bolster their cooperation in the Arctic, which de facto should be viewed as a combination of the economic and political aspects of their relationship. Since the outbreak of its war against Ukraine, Russia has been trying to convince its foreign partners—primarily in the Indo-Pacific region—to invest in the resource-endowed Arctic region and, as a result, cash in on exclusive opportunities for regional trade and logistics (Kremlin.ru, April 13, 2022). Yet, these sentiments have received little attention from either India or China. More recently, Russia has tried to make up for its de facto (for now. temporary) eviction from the Arctic Council by creating the Inter-University Consortium for Political and Legal Research in the Arctic, which aims to attract foreign—primarily, Indian and Chinese—experts, scientists and policymakers to issues and problems related to the Arctic region (Kommersant, December 14, 2022). For now, the results of this initiative are unknown. That said, India—to even a greater extent than China—is unlikely to embark on major costly projects in the Arctic. The lack of interest on the Indian side in terms of providing financial capital observed before the war coupled with international sanctions underline New Delhi’s wariness in developing projects for the Arctic, especially as Russia has become a pariah state on the global stage.

In conclusion, one additional aspect needs to be underscored: The aforementioned prognosis will only be proved or dismissed based on the actual results of future developments, including whether the West’s economic sanctions regime will work as designed. However, one practical aspect is clear: India may be slowly trying to distance itself from a toxic partner. Specifically, the end of 2022 was marked by the cancellation of the traditional Russian-Indian Summit—which has taken place every year since 2000 at the inception of the Russian-Indian strategic partnership—with no explanations provided (Kommersant, December 12, 2022). While a small detail, this development might be quite telling for the future of Russian-Indian relations during wartime.