Baiting the Bear

Baiting the Bear

Russian companies turn to India as a substitute for Western markets while the government explores bilateral opportunities. But the situation could swing both ways.

The Ukraine-Russia situation is gradually revealing itself to be a potential paradigm shifter in more ways than one. And, for India, the impact can now be felt closer at home. On one hand, the conflict has opened up new trade possibilities as Russian consumer companies and healthcare firms turn to India for both buying and selling purposes. On the other hand, we find big-brand Indian corporates taking an ethical stand against the Russian aggression in Ukraine and pulling out of Russian operations. At the same time, the Indian government is exploring options to buy Russian oil at a discounted rate – as Western markets close down to Russia.

India is also looking at other advantageous deals to make most of the Russian situation. Arrangements are being made to sort out the payment issue by reviving a system from the Cold War era in which both countries could pay each other via local currency. India has been going easy on Russia despite the Western bloc imploring it to take a harder, well-defined stand. All in all, it is a touch-and-go situation that could swing both ways.

A new sourcing hub

As the Western sanctions bar European and American companies from supplying their goods to Russia, the Russian corporates are looking at India for sourcing. This is especially the case for the consumer sector – including electronics, home decor, textile fabrics, apparel and fashion. Russia reached out to India for business ties despite apprehension on both sides on the payment issue.

  • Yandex Market, a major Russian online shopping platform with a daily customer base of over 4 million,is looking at procuring Indian apparel, textile, home improvement items, fashion, toys, furnishing, kitchen items, tea, and leather products as well as consumer electronics brands. They are used to global operations and have their own infrastructure for logistics, textile industry traditionally sourced from markets in Germany, China, Turkey and Italy. But now enquiries from Russia are pouring in for Indian polyester yarn. Several big Russian companies like Yandex Market, Ozon, X5 Retail Group, Pharmstandard, UNICONF and Simkodent have already customs clearance, storage and distribution. Hence, widening the sourcing funnel to include new geography would not be a problem for them.
  • According to Forbes, Ozon is among the top-5 most valuable Russian Internet companies. Also referred to as the “Amazon of Russia”, it is one of their first e-commerce companies – and just like Amazon, it started as an online bookstore. Now it is a multi-category e-commerce platform with the Gross Merchandise Value (GMV) increasing by 133% in Q4 2021 driven by the pandemic. Ozon has recently expressed interest in showcasing Indian products on its platform – as the pipeline for Western brands dries up.
  • In a parallel development, United Confectioners (UNICONF), the Russian confectionery market leader and the largest confectionery company in Eastern Europe, is looking at sourcing Indian agricultural produce for its raw material pipeline.
  • A similar interest was expressed by the X5 Group – Russia’s largest food retailer. It sources food products from over 60 countries and India is already on their list of top 20 suppliers in terms of import volumes. However, recent developments have prompted the group to expand its Indian supply base. X5 is eying Indian drinks, seafood, rice, grapes, tea, coffee, chicory, canned food, and also kitchenware.

A medical emergency

According to sources at the Pharmaceuticals Export Promotion Council of India, Russian healthcare firms are seeking pharmaceutical ingredients and medical equipment from India on an urgent basis. This follows a sharp drop in imports from Europe and China in the wake of the Ukraine invasion. Till now, India was a minor player in this sector in the Russian market. But that is about to change.

As reported by Bloomberg, medical equipment companies from both countries held a virtual meeting on April 22. It is understood that while some Russian companies want to connect with suppliers of specific pharmaceuticals, there are also companies eager to distribute them. A forum coordinator for the Association of Indian Medical Device Industry confirmed to Bloomberg that if things go as planned, Indian medical exports to Russia can shoot up nearly 10-fold this year – amounting to $26.2 million.

A few ethical moves

However, this is a paradoxical situation. While Russian corporates look at India and Indian suppliers should feel elated, at least two of the top Indian corporates recently took an ethical stand – wrapping up business operations in Russia in view of its Ukraine aggression.

Tech major Infosys, the fourth Indian company to cross $100 billion in market capitalisation, has announced transitioning all operations out of Russia to centres outside Russia. CEO Salil Parekh announced to the media that Infosys is providing re-skilling assistance for displaced employees and looking at whether“they can work in some of our locations in eastern Europe.”

In close succession, Tata Steel, one of the largest steelmakers both in India and Europe, exited the Russian market stating that it is “a conscious decision to stop doing business with Russia.” The company promised to ensure minimal disruption to the business. Although no specific contingency plan was announced, the company statement mentioned: “our steel manufacturing sites in India, the UK and the Netherlands have sourced alternative supplies of raw materials to end its dependence on Russia.”

Although this is in sync with global developments as companies worldwide are pulling out of, or scaling down, businesses in Russia – this is conspicuously different from the stand taken by the Indian government.

A gateway of opportunity

It looks like India is seeking to maximise its advantage. Not heeding the Western bloc, India has refrained from announcing any anti-Moscow measures. It abstained from voting at the UN to remove Russia from the UN Human Rights Council owing to its atrocities in Ukraine. Rather, India has offered to buy Russian oil at a heavily discounted rate, because Moscow will now be losing the Western markets. In normal times, India imported only 2-3% of its oil from Russia. But recently Indian Oil Corporation is reported to have purchased around 3 million barrels from Russia at a discounted price. India justifies its action by citing that Europe, and even the US, continue to import Russian fuel. Commodities analytics firm Kpler points out that India’s import of crude oil from Russia in March this year is nearly four times higher than the same period last year. And of course, India procures over half of its military equipment from Russia.

To boost bilateral trade with Russia, India is trying to sort out the payment issues, what with Russia’s sweeping international sanctions and current ban on the international forex market. The two nations are working on a payment system in local currencies similar to the one used during the Cold War – traditionally known as the rupee-rouble mechanism. Under this system, India paid in rupees for items purchased from Russia, equivalent to the value of the product in roubles. It is in fact a sort of barter system, under which Russia could import items from India worth the same value that New Delhi would procure from Moscow.

As per media reports, the Indian government has decided to allow Russia to invest in debt securities of Indian companies. This comes against a Russian proposal that India relax its External Commercial Borrowing (ECB) framework. This will allow Russian companies to invest in Indian bonds and pay for them through an account with the Reserve Bank of India (RBI). This system had been evoked only twice since the fall of the USSR – in 1993 and 2003.

Meanwhile, the Indian commerce and industry ministry are trying to fast-track issues faced by Indian exporters to Russia – like held-up payments, non-tariff barriers, and market access. Around $200 million of payments have already been released to Indian exporters – which is around half of what was pending since last month.

A clash of interests?

In his seminal article – The Clash of Civilizations –later expanded into a book in 1996, American political scientist Samuel P. Huntington put forward a theory that future wars would be fought not between countries, but between cultures. Huntington predicted a major shift of economic, military, and political power from the West to the other civilizations of the world. He suggested that the central axis of world politics in future would be dominated by the conflict between “the West and the Rest”. In this context, Huntington regarded Russia, Japan, and India as “swing civilizations” – nations that could ally with either side depending on the issue and benefits.

It is interesting to note that Huntington had bracketed Russia and India in the same category. Both are basically “orthodox” nations–comfortable with the Western approach yet conscious of local differences. India has had a longstanding alliance with Russia (or erstwhile USSR), but even that relationship had passed through several “swing” phases. In the early days of the Indian Republic, Nehru wanted to stay non-aligned. But as the arms race intensified, India under Indira Gandhi veered towards the Soviets to keep a US-backed Pakistan at bay. In a post-Soviet world in the 1990s when India opened up to globalisation, it was only prudent to lean towards a US-led Western bloc to gain maximum benefits of economic reforms. Russia, by then, was a spent force anyway. That approach has remained the mainstay of India’s foreign policy ever since. However, the Ukraine situation has raised some uncomfortable questions and India now needs to weigh its options yet again.

It is still not clear how tightly India is willing to hug the Russian bear. Going with Russia might be economically viable in the short term, but deserting the Western bloc on issues related to human rights violations could cost us dearly if we face similar hostilities from neighbours with greater clout in future. The US Secretary of State, Antony Blinken, clearly stated that “India has to make its own decisions about how it approaches” the Ukraine conflict. Are we really ready for another swing? 

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