Russia-Ukraine conflict: The deeper the sanctions, the more the opportunities that will open up for India: SBI's Soumya Kanti Ghosh

The US needs India more than others to balance the power in the resurgent Asian peninsula, said SBI's Soumya Kanti Ghosh (Illustration by Suneesh Kalarickal)

The Russia-Ukraine conflict is rapidly dividing the world into two camps. But India has so far managed to retain its stand– of neutrality–which serves its political and economic interests. There have been concerns that India’s stand may invite western nations’ displeasure, but SBI’s Group Chief Economic Advisor Soumya Kanti Ghosh has a different take. In an interview with Moneycontrol, he explained why he sees a new world order taking shape and how India can collaborate with Russia to benefit from it.

The interview reflects his personal views.

You have said that Indian exporters could benefit from the standoff between Russia and the western economies. Which sectors in particular could benefit and how? 

While the Indian exports to Russia in terms of quantitative scale have not been worth much (as discussed in our report), there would be great scope of increased exports in traditionally traded items such as pharmaceuticals, tea, rice, and in new areas such as medical devices, software/hardware, transport, machinery, mobile and telecom devices, chemicals, textiles/clothing and apparels, leather, ceramics and agriculture inputs. India is already working on ‘Sangam’, a key policy initiative in exports to Commonwealth of Independent States (CIS) countries. Russia’s ‘disconnect’ from other trading partners should create a void, which India would be able to fill… without risking being labelled an outlier by the west. The rapidly unfolding events make it difficult to predict a timeline over which this shift in trade relations will happen, but the time taken should be inversely co-related with impact of sanctions. The deeper the sanctions go, the more the opportunities that will open up for India (though, reduced purchasing power may curtail non-essential buying greatly). The two countries had planned to touch $30 billion trade by 2025, but the current scenario should get us to that target much before.

Also read: The war an opportunity for rupee's internationalisation: Ghosh

Like you have said, Russia is likely to swing towards China. It seems inevitable that this would happen. How can India present itself as a stronger economic ally to Russia? 

The hob-nobbing between Russia and China seems more towards giving the west a fitting reply that it should stop policing the new world order, as digital architectures are changing the contours of trades. This has made the world truly flatter, opening new lines of trouble-free communication across geographies. This posturing suits China, which has been short charged in the recent past, for example, with the banning of Tik-Tok and Huawei/other telecom firms. Also, two years of Covid-19-led disturbance has caused mistrust to build in the western economies, and they are being forced to reconsider their huge imports from the mainland and (diversify) at the first chance.

Given all this and India’s growing global acceptability, the dominance of the Indian diaspora in circles of influence worldwide and the maturity shown by the political leadership here, Russia will need to adopt a balanced approach with China. Russia will need to give enough elbow room to India, its tried and tested partner of decades, with non-binding terms and zero baggage.

Also, China does not seem to be dictating terms to Russia and its allies on what moves they should make in the current gameplan. Also China would not want to appear as involved in the current turmoil since its exports to the world are already under threat from other Asian powers.Which sectors in India will benefit from allowing Russian investments in the corporate debt market? 

The discussions around allowing Russian investments in India’s corporate debt markets are nothing new, since the two countries have already set goals of reaching bilateral investments of $50 billion by the year 2025. In the current arrangement, the Russian side should be given a choice to invest in bonds of better-rated corporations first, without much stress on sector specific allocations.

With the earlier Rupee-Ruble (R/R) arrangement falling apart from the huge trade imbalance, what makes you optimistic about a similar arrangement this time--of participating in each other's debt markets through the local currency? 

The earlier R/R arrangement, in all probability, was propagated at one of the most inopportune moments, with erstwhile USSR’s experiments with Glasnost and Perestroika having gone awfully wrong while India’s own BoP nightmares made the exercise utterly meaningless. In 2022, the economic realities have changed–countries are facing different kinds of economic challenges and aggressions. For example, currency wars are taking a new shape, with the onslaught of digital currencies and central banks’ hurried responses in propagating CBDCs to check this tornado. In this new reality, the R/R arrangement should work well for India and Russia in settling (bilateral netting would be preferred) the imports and exports in select domains such as defence, energy, food grains calibrated and stabilised as we reach the bridge. As of now, the investments are being proposed in Indian Corporate markets. Indian investors, who have diverse global portfolio allocations, may not be as interested to shop around the red square since they would be worried about the US actions.

If the war prolongs and there is further isolation of Russia, will the alternate payment system set up by RBI and VEB be sustainable? Will Indian banks face sanctions? 
Going by the payment and settlement structure, the final arrangement is between the two central banks (RBI and VEB (SDC)). Individual banks have been kept out, to protect them. We think the mechanism devised will work well. It involves individual customers raising invoices and receiving payments in their designated bank accounts, through mirror accounts maintained by respective banks, at the central banks. Since the mechanism is between two central banks, the chances of individual banks inviting sanctions seem far-fetched.

What are the risks of increasing exposure to the Russian economy, when India is dealing with a rising inflation? 

The pricing of the Ural oil, at a hefty discount from pre war price levels, will help in the government’s efforts to not front load the spiralling prices to common people. India acting to secure some energy security, even while opening two-way channels of economic co-operation, should actually reduce the inflationary pressures through new opportunities.

If India deepens its ties with Russia and upsets the US, won't it be risking its $170+ billion (FY22, April-Dec) software exports? 
Henry Kissinger, the celebrated US diplomat, credited with shaping the US foreign policy, in particular with its Asian counterparts in the seventies, once famously quipped that it was the economic interests that decided America’s friendships. The US needs India more than others to balance the power in the resurgent Asian peninsula. The US’s interests are served well by India’s lucrative, upwardly mobile markets, and its fiercely independent tech behemoths are linked strongly to Indian software/hardware supply and human capital. Therefore, it is nearly impossible for India’s software industry to face any headwinds through India’s tilt towards Russia.

Also read: The world can't break its oil habit

Since Russian oil only accounts for 2-3% of India's oil imports currently, can India realistically depend heavily on Russia for its energy needs? Won’t recalibrating supply chains and refining technologies be time consuming, and extremely difficult during a conflict situation? 
The recent announcements from MEA and the Indian embassy / Consulates in Russia give an insight into India’s efforts to build an alternate supply chain, capable of handling additional imports from the Russian side, should the math work out profitably for us. There have been hectic parleys and meetings between the oil majors from both sides. The shipping contract stipulates that it would be the responsibility of the exporter to reach the crude at designated Indian ports, thereby eliminating any high seas risk of embargoes affecting the Indian side. So, practically Indian oil majors have little worries on the transport part, or associated costs since it would be borne by Russian majors. Ural oil definitely has a little complex constitution (compared to Brent) but given the technical wherewithal of our refiners, a little tweak in system should take care of cracking complexities at upstream and downstream points.

(Soumya Kanti Ghosh acknowledges the inputs given by Ashish Kumar, Chief Manager, State Bank of India, for this interview.)