Opportunities and challenges for India as Russia reaches out amid sanctions

Gains likely with working of a crucial corridor, revival of Rupee-Ruble trade and benefits for Indian insurers; setback for New Delhi's financial sector foray into Moscow

Russia has already reached out to India to use the International North South Transport Corridor (INSTC) across Central Asia, using the Chabahar port in Iran, to transport emergency supplies of grain. The interest is one of the several other positive economic fallouts of the Russia—Ukraine crisis for India.

Indian insurance companies are also considering higher ceding premiums for treaties with European reinsurers. As war clouds hover over Europe, Indian companies are concerned about their exposure to risks in these territories. This is significant, since traditionally the Europe and US-based reinsurers have negotiated higher rates to cover reinsurance for the supposedly more risky Indian insurance market.

Moscow has, meanwhile, already sent at least three container vessels, with one having reached Colombo port with supplies of urea, and other petroleum derivatives like LDPE and HDPE, for India. Since the return leg via the Suez Canal and then into the Black Sea has become increasingly difficult, talks are on to make the voyage via the Chabahar port, where India operates two container terminals.

An informed source said while the ships are sourced from the Astrakhan SEZ in Russia, they are being run by crews from the Turkmenistan shipping liners. “The Russians wish to run the first voyage within a week and the next two within April,” the source said. The presence of nationals from neutral countries will ensure that the problems of presence of Russian crews in Indian or Iranian ports will be avoided. The port of choice is Chabahar, the source added.  

A round trip from Jawaharlal Nehru Port from Kandla in India to Chabahar and back takes about seven days. From the port the shipments can use the Eastern route via Afghanistan or the Western route that straddles the Iranian sea shore to reach the Central Asian states.

“Whatever the Russian compulsions, the advantage for India is the revival of interest in the INSTC as a long-term trade route”, said Sohel Kazani, Managing Director of Bharat Freight Group of Companies. His company has been involved with the Chabahar adventure for several years as a freight forwarder.

INSTC’s business viability has, for years, been hobbled by the current low volume of trade of India with Central Asia. In 2020, India’s trade with the entire region including Russia was just $16.1 billion ($15.8 billion in 2018), just 2 per cent of India’s total annual trade volume. Russia’s current troubles could be the right trigger to revive the 12 nation INSTC project as an alternative cheaper trade route, to the Suez Canal.

The other is the revival of the Rupee-Ruble trade that had been almost dumped for decades. Talks are on in the government for restarting the dormant exchange mechanism. For India, the key challenge will be to designate the Indian bank which will steer the business. To do business with sanctions hit Iran, the Indian government had designated UCO Bank and IDBI Bank. It is expected that UCO Bank will again carry the mantle. This is one of the banks, which has been kept out of the big mergers that happened in the banking space among government run ones, in 2020.

The big challenge will be how to make operational the MoU signed between the Russian Railways (RZD) and Indian Railways-run Concor in 2020, to jointly develop multi-modal logistics services along the INSTC route. The project was based on the promise of a long-term secure line of financing from the Russian Direct Investment Fund (RDIF), established in 2011. Concor had begun work on inviting tenders for the project,  but now since RDIF has been hit by sanctions, it pushes back the timeline for the project to an indefinite future.  

Financial gains:

While Indian insurance companies will not benefit from these trade connections, because of continuing sanctions on Iran and new ones on Russia from the US dominated financial system, there are other benefits which could accrue.

Business at GIC Perestrakhovanie LLC, the 100 per cent owned subsidiary of India’s national reinsurance company GIC Re, is set to expand in the absence or closure of European rivals because of the crisis. The company was set up in 2018 and does mostly property insurance in Russia. “These are transacted in Rubles and so long as the conversion window with the Indian Rupee is open, we do not see any adverse impact”, said a government source. The company’s geographical spread is limited to Russia and the Central Asian countries. It does not underwrite the oil transport business of Indian refiners and so does not have to restructure its portfolio.

However, those shipments of Indian refineries from Russia, might soon be handled by only Indian insurance companies. There was strong competition among the global insurance companies to capture these trades, since the risks are considered low. But the sanctions on Russia have made it difficult for them to offer any cover now.  For instance Indian Oil has advised traders planning to sell it oil that it will no longer accept cargoes of Russian crude oil and Kazakh CPC Blend on a free-on-board terms. The traders must include an insurance cover with their consignments because of higher war risks in Black Sea. This opens up opportunities for Indian insurers to grab the trade.

India’s other financial sector foray in Russia, is Commercial Indo Bank, Moscow. It needs regulatory approvals from Russia to develop full-fledged operations, which are unlikely to come through in a hurry in the present disturbed climate. So those will likely be delayed.

The projects which will possibly not be affected by the sanctions raining down on Russia, are the ones signed for construction of the second nuclear power plant units, at Kudankulam, in India. In the joint statement signed by Russian President, Vladimir Putin and Indian Prime Minister Narendra Modi, in December last year, there was mention of the continuation of technical discussions on the pressurised water reactor of Russian design along with joint manufacturing of equipment and localization of components. But the plans for joint development of a nuclear power plant in Bangladesh and for similar ventures in other countries, are now off the table.

Similarly the planned cooperation between the Russian State Space Corporation "Roscosmos” and the Indian Space Research Organization, Isro are also likely to continue. On the plate are plans for human spaceflight programs and satellite navigation including operation of launch vehicles and ground-based space infrastructure.

India Russia investments

• Making International North South Transport Corridor operational 
• Russian Railways (RZD) and CONCOR developing multi-modal logistics services along INSTC route
• Russian participation in Production Linked Incentive Scheme
• Commercial Indo Bank, Moscow, the only Indian Bank operating in Russia yet to get regulatory approvals
• GIC Perestrakhovanie LLC, a 100% subsidiary of General Insurance Corporation of India, commenced its operations in September 2020 —-offering reinsurance support to all major general insurers in the Russian Federation
• JSC Rosneft Oil Company offered investment space on Vankorneft, Sakhalin-1 and Taas-Yuryakh Neftegazodobycha projects
• Development of second phase of Kudankulam nuclear power station with technical discussions on the VVER 1200 of the Russian design, joint manufacturing of equipment and localisation of components
• State Space Corporation "Roscosmos” and the Indian Space Research Organisation, work