Flashpoint Ukraine

India's economic and geopolitical options are narrow

Russian President Vladimir Putin’s high stakes move on Tuesday in recognising two breakaway republics in eastern Ukraine and sending troops as “peacekeepers” come at an especially inopportune time for India. At its most obvious, the significant upward pressures on oil prices, exacerbated by the Organisation of the Petroleum Exporting Countries’ recent unwillingness to raise output, will accentuate inflationary impulses and increase risks for the Reserve Bank of India’s inflation projections. The escalating situation in Eastern Europe has also added a layer of complication to state-owned oil companies’ plans to raise retail prices after the Assembly elections. A sharper than expected rise in pump prices cannot be ruled out. Although Russia is not a major trading partner with India — total trade has varied between $8 billion and $11 billion in the past decade — the historic nature of the economic relationship could impact the country in significant ways. For one, more than 60 per cent of India’s defence forces are equipped with Russian weapons — and New Delhi recently bought its SS-400 missile protection system. The country, therefore, remains dependent on Moscow for spare parts and technology transfers that escalating war in Ukraine could disrupt. 

This is a development India can ill afford in the face of sustained Chinese aggression on the northern and north-eastern borders. India may also find its climate change commitments under pressure as the planned transition to greater use of gas as one clean energy source may fall out of reach as prices spiral. As the stock markets have shown, geopolitical trajectories will impact corporate bottom lines too. Reliance Industries, India’s largest oil exporter, may see healthy margins for its refinery as prices rise. But additional sanctions from the US will create huge problems for the tea industry. Russia accounts for 18 per cent of Indian tea exports. With sales to the other major buyer, Iran, constrained by sanctions for some years, the employment-intensive Indian tea industry, already struggling with low productivity and rising costs, may find itself in a fresh crisis. On the larger scale, other Europe- and Russia-facing exporters, such as in engineering and pharmaceutical, may also come under pressure in the event of a full-scale war over Ukraine. 
 

On the diplomatic front, India has consistently remained committed to diplomacy, extending support to the Normandy process and the Minsk agreement that offer a halfway house between annexation and independence. But New Delhi’s position is somewhat complicated by closer Russian and Chinese ties, not least Beijing’s overt support for Russia’s Ukrainian ambitions. The crisis could well cause a readjustment of US attention away from the Indo-Pacific at a time when India may urgently require a robust counterbalancing alliance to China’s expansionary ambitions in the region. The possibility of an escalation in the form of a full-scale invasion of Ukraine hangs in the balance. Germany’s decision to cancel the Nord Stream 2 gas project, the lynchpin of Mr Putin’s strategy to pressure Europe and bypass traditional supply routes through Ukraine, points to one kind of response to Russian brinkmanship. It is unclear how Mr Putin will respond to the US administration’s call for negotiations with the subtext of further sanctions if matters escalate. All of this means that India is in the uncomfortable position of waiting and watching.