Indian corporates brace for delay in receivables, defaults as Russian rouble tanks

Indian corporates may face an elongated receivable cycle, or even default on payments by Russian importers due to the sharp fall in Russian Rouble, bankers said. The Russian Rouble fell nearly 30% on Monday against the US dollar after the country’s premier Vladimir Putin on Sunday ordered his nuclear forces to be on high alert in view of the evolving Russia-Ukraine conflict.

Separately, in view of the steep depreciation of its currency, the Bank of Russia on Monday decided to increase the key rate to 20% per annum from 9.50%, the sharpest rate hike since 2014, to compensate for the increased depreciation and inflation risks. “This is needed to support financial and price stability and protect the savings of citizens from depreciation,” the central bank said.

Indian companies have a significant presence in Russia. As per data by Indian embassy in Russia, bilateral trade between the two countries between April 2020-March 2021 amounted to $8.1 billion. Indian exports amounted $2.6 billion while imports from Russia amounted $5.48 billion. For the same period, as per Russian figures, bilateral trade amounted to $9.31 billion, with Indian exports amounting to $3.48 billion and imports amounting to $5.83 billion. Energy, fuel, pharmaceutical and infrastructure are some of the key sectors of investments by Indian corporates in Russia.

“In our view, if the contracts are denominated in dollar or Euros, then there should not be an impact on the cash flows of Indian Corporates, however, because of sharp depreciation of Russian currency, Russian importers may face challenges in terms of their payments for their export obligations,” said Anil Gupta, vice president and co-Group head at ICRA. This could lead to longer payment cycles for Russian companies, longer receivable cycle for Indian corporates, cancellation of contracts or even default by Russian importers, he said.

Worryingly, even if receivables are covered under insurance or letter of credits by other non-Russian banks, will the parties involved declare a force majeure because of an act of war also needs to be seen, Gupta added.

Further, India is one of the largest importers of Russia-produced military equipment and weapons. Due to economic sanctions by Western countries, Russia will be impacted as restrictions on import of technologies as well as critical components come into place which in turn will also impact India.

“India already has an existing contract with them (Russia) of buying S-400 and stealth frigates. India had signed agreements with Russia for supplies of a range of missiles and ammunition for use by the Indian Army. Second issue will be payment with dollar transactions due to sanctions…A severe depreciation in Russian rouble backed by the reason of war is putting pressure on crude oil prices which has a negative impact on India both in terms of inflation and the current account deficit,” said Kunal Sodhani, assistant vice president at Shinhan Bank (Global Trading Center, FX and Rates Treasury).

Bankers also say a sharp depreciation of rouble is not new to India as the currency was devalued in FY15. “A weaker domestic currency is always seen as beneficial to the export sector and therefore India could gain to some extent as imports from Russia may cost less in dollar terms. However, the current depreciation of rouble is more a result of geopolitical issues and could be temporary. While it could still take unexpected turns and may prove to be worse in the short time frame as there are other issues like payments and settlements, repatriation of investments etc., over medium term, the impact should be muted,” said Gurumurthy R.K., head of treasury at Dhanlaxmi Bank.

As per Ukraine’s Ministry of Defence, Russia has lost approximately 5,300 troops fighting against Ukraine on field as on February 28.