INSTC to Improve India-Russia Connectivity with Cheaper Multi-Modal Transit Routes
The INSTC includes 13 countries and will transform Euro-Asian freight dynamics
By Melissa Cyril, Maria Kotova and Chris Devonshire-Ellis
The recent Suez Canal blockage, which cost the global economy a hefty US$9 billion, has raised the profile of the International North South Transport Corridor (INSTC) as a cheaper and faster alternative multimodal transit corridor. Presently, the INSTC connects India with Nordic Europe, Central Asia, Russia, and has the potential to expand up to the Baltic and Arctic regions – which are slowly being drawn into the Northern Sea Passage route as that becomes economically viable.
Multimodal routes through sea, rail, and road under the INSTC aim to reduce the carriage cost between India and Russia by about 30% and bring down the transit time from 40 days by more than half. The INSTC connectivity initiative, when viewed with its underlying commercial advantages, can initiate transformative development in the region, facilitating trade, transit, and overall economic development.
What is the International North South Transport Corridor?
The INSTC is a 7,200 km-long multimodal transportation network encompassing sea, road, and rail routes. It links the Indian Ocean to the Caspian Sea via the Persian Gulf onwards into Russia and Northern Europe and offers the shortest connectivity route between them.
It was launched in 2000 with India, Russia, and Iran as its founding members. Work on actualizing the corridor began in 2002. Since then, INSTC membership has expanded to include 10 more countries – Azerbaijan, Armenia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkey, Ukraine, Syria, Belarus, and Oman. Bulgaria has been included as an observer state. Baltic countries including Latvia and Estonia have also expressed interest in joining the INSTC.
The Russian Deputy Industry and Trade Minister, Choriyev Ergashevich, has called the INSTC a “very important corridor for the development of freight traffic in the region”, and suggested that member countries should collaborate on the joint design and construction of container ships and railway lines.
India looks at the INSTC as an economic corridor that bypasses Pakistan (with which it has security and political disputes) and one that can develop relations with Russia, Central Asia, and Europe – tapping into new markets and easing access to energy resources in the region.
Last year, the Container Corporation of India (Concor) and Russian Railways container transportation subsidiary RZD Logistics JSC signed a service agreement to transport cargo between the two countries using a single invoice. A memorandum of understanding to facilitate this was signed in 2019. Concor is keen to use the INSTC route to facilitate export of goods, including pharmaceuticals, vegetables like onion, spices, and tea from India that have huge demand in Russia.
Parallel to these developments, the proposed Chennai-Vladivostok Maritime Corridor also seeks to improve trade connectivity between India’s eastern seaboard and the Russian Far East. The 10,000-kilometer sea route could enable cargo transfers in 24 days from the present 40 days.
India and Russia are committed to expanding bilateral trade, looking at increasing this to US$30 billion in annual trade volume by 2025, up from the current US$11 billion, which has been largely based on arms sales to India. The two countries are also working on an ambitious agreement for the long-term import of crude oil from Russia’s Far East region.
Architecture of the INSTC: Transport routes and modes
The INSTC spirals across the following branches:
- Central branch: It begins from the Jawaharlal Nehru Port, India’s largest, part of the Mumbai region in India’s western Maharashtra state on the Indian Ocean. It then connects via a 1,275 km maritime route to ran’s Bandar Abbas port on the Strait of Hormuz. It then passes north through Iran overland via road and rail to Nowshahr, Amirabad, and to the Caspian Sea at Iran’s Anzali Port where it can be dispersed further to the Lagan and Astrakhan Ports in Russia, as well as ports in Azerbaijan, Turkmenistan, and Kazakhstan. We summarized the Caspian maritime distribution network in this article here.
- Western branch: This connects Azerbaijan’s railway network to Iran’s via the cross-border nodal points of Astara (Azerbaijan) and Astara (Iran) and further to Jawaharlal Nehru port in India via sea route. Recently, on June 21, 2021, INSTC’s western corridor was operationalized to dispatch a consignment from Vuosaari, Finland to Mumbai, India – this test consignment is transiting Russia, Azerbaijan, and Iran to reach Mumbai in an expected 22 days compared with 40 days taken via the current Suez Canal and West European ports.
- Eastern branch: This connects Russia to India through the Central Asian countries of Kazakhstan, Uzbekistan, and Turkmenistan.
The INSTC: Regional Institutions and Free trade agreements
Although INSTC progress of the corridor has taken time to organize, it has recently picked up pace, motivated by numerous geopolitical and geo-economic developments. While there are several factors, including a rebalancing of regional power at work in the conceptualization and steering of the corridor, the sustainability and success of the INSTC rests on its economic viability in addition to the commercial benefits accrued by the participating nations.
The primary reason for this is its equality-based approach, which provides the same level playing field to all the members, and especially when juxtaposed with its Chinese counterpart, the Belt and Road Initiative.
- Both Russia and India are full members of the Shanghai Cooperation Organisation, which also includes China, Kazakstan, Tajikistan, Kyrgyzstan, Uzbekistan and Pakistan. Iran is an observer state while INSTC members Armenia, Azerbaijan, Belarus, and Turkey are all dialogue partners. This increasingly influential body discusses regional security, integration, and trade.
- Russia and India have both favored economic integration with the countries that are part of the INSTC and have concluded Double Taxation Avoidance Agreements (DTAA). Russia has signed DTAAs with Armenia, Azerbaijan, Belarus, Iran, India, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
On its part, India has signed DTAAs with Armenia, Belarus, Iran, Kazakhstan, Kyrgyzstan, Russia, Turkmenistan, Ukraine, and Uzbekistan. Negotiations are ongoing for signing the same with Azerbaijan and Tajikistan. Steps are being taken for initiating negotiations with Moldova.
- India has signed Bilateral Investment Protection Agreements (BIPA) with Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Tajikistan, Ukraine, Russia, Armenia, and Belarus. Steps will be taken for signing BIPAs with the rest of the Commonwealth of Independent States (CIS) countries, that is, Azerbaijan, Georgia, and Moldova.
- India is in talks to work out a free trade agreement (FTA) with the Eurasian Economic Union (EAEU), which includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia.
- The EAEU has a combined population of 167 million and a GDP of about US$5 trillion. In 2019, trade turnover between EAEU member states and India amounted to US$13.8 billion, and in the first nine months of 2020, reached US$9 billion. Russia is India’s biggest trade partner among EAEU nations. A free trade zone between India and EAEU would boost trade turnover to US$15 billion – an immediate 25% increase.
- The EAEU also has additional Free Trade Agreements with Iran, Serbia, Singapore, and Vietnam, while China has signed an agreement however s still in the process of agreeing tariffs. Other nations are known to be in discussions with the EAEU concerning FTA, including most of the ASEAN nations, Pakistan, Uzbekistan, Turkey, Israel, and Egypt.
Potential transport and logistics gains from the INSTC
The INSTC envisages development and simplification of transportation services catering to both goods as well as passengers, while at the same time providing an increased market access to the member nations who can also benefit through various backward and forward linkages.
Member nations can develop themselves as logistics and transit hubs but can also focus on developing themselves as added value manufacturing hubs through hard and soft infrastructural development. while considering route security, and environmental protection.
- Short distances and faster deliveries lead to cost reduction: The INSTC is the shortest trade route connecting Russia with India. According to a study conducted by the Federation of Freight Forwarders’ Association of India (FFFAI) in 2014, INSTC was 30% cheaper and 40% shorter than the traditional Suez route, slashing the transit time to an average of 23 days for Europe-bound shipments from the 45-60 days taken by the Suez Canal route.
- Increased market access along with creation of new markets: Cheaper transport costs will lead to increased competitiveness of trade, such as between India and Russia, provide access to Iran and other regional markets, while opening access to unfulfilled markets, especially in Central Asia – a spur of the INSTC heads east to Afghanistan where it is expected to connect with the planned Trans-Afghan railway connecting north to Uzbekistan and south to Pakistan’s Arabian sea ports.
- Facilitation of transit by helping develop regional transit and logistics hubs: Under the agreement, Iran and Azerbaijan are expected to develop into transit hubs. In India, Nagpur and Bhiwandi from Maharashtra state are identified as potential logistics hubs. With an estimated capacity of 20-30 million tons of goods per year, the corridor facilitates transit and trade connectivity.
- Creation of regional supply chains across Eurasia: The creation of diverse supply chains across Eurasia will alter the stereotype of East as the producer and West as the consumer.
- Increased trade volume between member nations: The trade statistics among the member nations of INSTC reveal a dismal picture so far. Exports from India form a mere one percent of total exports in the CIS region. With Russia, India’s trade has so far been mainly restricted to energy and defense equipment. India also has a huge trade deficit with Russia. The most cited reason for negligible trade in other goods is lack of information on Indian markets among the Russian business class. The trade situation in the Central Asian Region is little better with India having a negligible share in these countries’ imports. The main reason for low trade with the landlocked Central Asian countries is lack of connectivity, however this has been enhanced with Iran’s Chabahar Port, directly connecting Inda with Iran for the first time since 1947. The INSTC will not only enhance physical connectivity but will also improve knowledge and information sharing mechanisms and rennet with previous traditional markets inaccessible since partition. These underexploited markets hold significant trade and consumer growth potential.
- Creation of backward and forward linkages: The member nations along the INSTC have an opportunity to transform themselves into specialized transit and manufacturing hubs through infrastructural development. This will stimulate local industry, manufacturing, and trade along the way, transforming the transport corridor into a developmental corridor. It will also help in creating further employment and growth opportunities, leading to an improvement in the overall regional economies.
- Supply of energy as a commodity: With India being the fifth largest energy consumer in the world, consuming 4.4% of the global total, improved connectivity, and trade prospects with the energy rich member nations sch as Iran and Russia cannot be overlooked. Another oil pipeline development along the INSTC cannot be ruled out.
- Synchronization of INSTC with Ashgabat Agreement and Organization of the Black Sea Economic Cooperation (BSEC): Linking the INSTC to existing transport initiatives in the Central Asian region such as the BSEC (Europe-centric) and the Ashgabat Agreement (Central Asia-centric) will expand trade linkages and opportunities in the region.
- Possible synchronization with Baltic, Nordic, and Arctic corridors in the future: Alongside the North Sea-Baltic Corridor, INSTC may synchronize with the Scandinavian-Mediterranean (ScanMed) Corridor and the planned Arctic Northern Sea Passage in the future.
Indian trade and investment with Russia
Bilateral trade in 2019 amounted to US$11.16 billion, with Indian exports amounting to US$3.92 billion and imports amounting to US$7.24 billion. Russia-India bilateral trade during the period January-October 2020 amounted to US$7.02 billion, with Indian exports amounting to US$2.73 billion and imports from Russia amounting to US$4.29 billion.
Major items of export from India include electrical machinery, pharmaceuticals, organic chemicals, iron and steel, apparels, tea, coffee, and vehicle spare parts. Major items of import from Russia include defense equipment, mineral resources, precious stones and metals, nuclear power equipment, fertilizers, electrical machinery, articles of steel, and inorganic chemicals.
Bilateral trade in services has remained stable during the last five years with the trade balance in Russia’s favor. While in 2017, trade in services was US$1,095.4 million, it reduced slightly in 2018 to US$999 million. The figure stood at US$633.68 million for the period January-June 2019.
According to estimates on the Indian side, the volume of accumulated Russian investments in India is around US$18 billion, of which about US$8.5 billion were recorded in the period 2010-2019.
Russian investment in India in 2017 reached US$18 billion and India’s total investment in Russia is around US$13 billion. Cumulative Indian investments in Russia, (bulk of which is in the hydrocarbons sector) was about US$8 billion for the period 2000-2014, while the cumulative Russian investment in India over the same period was about US$4 billion, mainly in the automotive (KAMAZ) and telecommunications (AFK Sistema) sectors. In 2015-2017, there was a renewed emphasis on increasing the bilateral investment, especially in the hydrocarbon sector.
According to the Russian Bank, Russian overseas direct investment (ODI) to India in 2018 was US$121.2 million and in 2019 was US$103.6 million.
Both Russia and India have introduced initiatives to promote bilateral investments by facilitating high-level government to business (G2B) and business to business (B2B) contacts as well as highlighting opportunities in strategic sectors. According to the Indian Embassy in Moscow, around 40 sector-specific B2B events were organized in 2019.
Investment cooperation has been envisioned in priority sectors, such as hydrocarbons, power, coal, nuclear power, fertilizers, IT, mineral and metallurgy, steel, pharmaceuticals, and infrastructure projects.
For example, Kirill Dmitriev, CEO of Russian Direct Investment Fund (RDIF), Russia’s sovereign wealth fund responsible for marketing the Sputnik V vaccine globally said on the sidelines of the 24th St Petersburg International Economic Forum (SPIEF) in June that India was Russia’s strategic partner for the vaccine roll-out. He elaborated: “India is our strategic partner as far as Sputnik V vaccine is concerned. We even call it a ‘Russian-Indian’ vaccine because India is going to become one of the major manufacturing centers for Sputnik V.”
Top Russian investors in India are: Essar Oil, US$5.85 billion; MTS – investments in the Indian telecommunications sector, US$4.5 billion; DST Global Portfolio Investments, US$450 million; Ru-Net Holding Portfolio Investments, US$200 million; USM Portfolio Investments, US$90 Million; Sistema Asia Fund, US$60 million; NLMK, US$12 million; and Kamaz US$10 million.
Development of banking links
The development of banking links between India and Russia has seen some progress. Several Russian banks have opened their Representative Offices/Branches in India. These include VTB, Sberbank, Vnesheconombank, Promsvazbank, and Gazprombank.
Similarly, the Commercial Bank of India LLC (JV of two major Indian banks: SBI and Canara Bank) provides banking services in Russia.
Businesses in Russia looking to take advantage should be discussing business intelligence and market research programs to properly define the size and accessibility of these respective markets – India is a huge country and a program to maximize initial investments – and where – need to be developed.
This is where our firm can assist – Dezan Shira & Associates maintain offices in Russia as well as Delhi, Mumbai, and Bangalore and can assist with developing business plans for Russian producers looking at the Indian market. We also have a deep knowledge of Eurasian and regional interconnectivity. Interested parties may contact Maria Kotova at firstname.lastname@example.org
Russia Briefing is written and produced by Dezan Shira & Associates. During these uncertain times and sanctions imposition, our firm assists Russian companies relocate to Asia, and provides financial and sanctions compliance services to foreign companies operating in Russia. We also provide market research and advisory services to foreign exporters interested in Russia as the economy looks to replace Western sourced products. Please contact us at email@example.com or visit us at www.dezshira.com.