Reports indicate that Indian Oil Corporation (OIC) has bought 3 million barrels of Russian oil at discounted price for May delivery. Altogether, Indian companies may buy up to 15 million barrels of discounted oil from Russia in 2022.
These deals are not very significant from the energy market perspective. India’s daily oil consumption is about 4-5 million barrels a day. However, geopolitically, the move is important. Many in the West would see this move as a tilt towards Moscow, particularly when Western nations are trying to isolate Russia.
Although Russia is a major energy exporter and India buys bulk of its oil and gas from international markets, Russian energy imports are a miniscule part of India’s total imports. Because of extensive economic sanctions including SWIFT cut-off for many Russian banks, India may be worried about arms imports payments, and other trade transactions.
Russian arms imports including S-400 missiles and stealth frigates are crucial for Indian defence modernisation. Russia is also important for fertiliser, diamonds, and edible oil imports as well as pharmaceuticals, shrimps, and tea exports. Already payments worth $500 million due to Indian exporters are stuck because of sanctions. These issues are far more important than buying a few extra million barrels of oil from Russia.
Therefore, if India is able to work out a new payment mechanism based on domestic currencies, India-Russia economic and defence linkages could be insulated from current western sanctions. In the process, India could also buy some extra discounted oil. If successful, the mechanism could fundamentally change India-Russia economic dynamics in the coming years.
One of the key elements of the old Indo-Soviet friendship was a special trade and economic relationship built on the Rupee Trade System (RTS), based on annual plans. In fact, in 1990-91 more than 16 percent of Indian exports went to the erstwhile USSR.
Despite several weaknesses, the system helped many small and medium private Indian companies become exporters. Since both the currencies were non-convertible, the value of exchange was arrived at through periodic bureaucratic negotiations. The RTS was terminated in 1993. Although many Indian policy makers were still sympathetic to the RTS, the new Russian elite was keener to trade in hard currency.
While both started trading in hard currency in the 1990s, India continued to pay its earlier civilian and military loans in Indian currency for many years. Russia used these payments to buy Indian products. Later, it also invested this amount in Russian projects in India.
In the last few bilateral summits, there was renewed interest on the subject again. During Russian President Vladimir Putin’s New Delhi visit in December, India and Russia announced intentions to promote ‘mutual settlements of payments in national currencies’.
Obviously, this is not a new subject for Indian and Russian policy makers. They have dealt with payment mechanisms in national currencies for decades. Even in new circumstances, some homework has already been done in the last few years.
Sanctions against Russia and continued depreciation of its currency may create new complications. Some reports say that officials are also looking at the possibility of a floating exchange rate with a third currency as a reference. There are also discussions of linking the Indian Unified Payments Interface (UPI) with the Russian Faster Payments System (FPS).
India also has to identify a bank, which is not exposed in the European and American markets. For the Rupee-Rial arrangement with Iran, the UCO Bank had acted as a facilitator. In fact, Iran is also showing interest in re-launching the mechanism again.
If transactions with Moscow are made possible through the Rupee-Ruble mechanism, many Indian companies could explore the Russian market for trading new commodities. As Western firms are exiting, Moscow could also be looking towards China and India to fill the gap.
In the three decades since the collapse of the Soviet Union, New Delhi and Moscow have been able to restore close political and strategic ties. However, commercial ties, which were earlier based on a special arrangement, remained the weakest link.
The new geopolitical situation is perhaps pushing both the countries to go back to earlier arrangements. This may be the beginning of a new era of India-Russia commercial partnership. Interestingly, this also fits well within India’s ambition of strategic autonomy and the Atmanirbhar Bharat Abhiyaan (self-reliant India campaign).
Gulshan Sachdeva is Professor at the Centre for European Studies and & Coordinator, Jean Monnet Centre of Excellence, Jawaharlal Nehru University. Views are personal, and do not represent the stand of this publication.