Russia and India to Boost Economic Cooperation and Trade

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By Marina Romanova

prime-minister-narendra-modi-and-russian-president-vladimir-putinIn a way to re-establish “the special and privileged nature’ of their strategic partnership, Russia and India have set the goal of boosting bilateral trade to US$30 billion and mutual investment to US$15 billion by 2025.

However, Russian-Indian trade cooperation leaves much to be desired. For Russia, India is in 19th place in terms of turnover, according to 2014 data, while for India – Russia is in 34th place only. In 2015, this turnover was further reduced by another 18 percent which is, as Russian president Vladimir Putin phrases it, “largely associated with volatility on the global markets and in exchange rates”.

According to the Indian Embassy in Moscow data, bilateral trade during in 2015 amounted to US$7.83 billion (decline of 17.74 percent over 2014), with Indian export amounting to US$2.26 billion and imports from Russia amounting to US$5.57 billion.

Major items of export from India include pharmaceuticals; tea, coffee and tobacco; nuclear reactors and boilers; machinery and mechanical appliances; organic chemicals and electrical machinery and equipment. Major items of import from Russia include pearls, precious and semi-precious stones and metals; nuclear power equipment; electrical machinery and equipment; mineral, oil and its products; iron and steels; optical, precision and surgical equipment.

Indian investment in Russia are estimated to be about US$8 billion which include Imperial Energy (Tomsk city); Sakhalin I offshore project; Volzhskiy Abrasive Works (city of Volgograd); and Commercial Indo bank. Russian investments in India total about US$3 billion, including Kamaz Vectra in Hosur; Shyam Sistema Telecom Ltd, Sberbank and VTB, Russia’s two biggest lenders.

At the same time, Indo-Russian rather limited economic cooperation seems to gradually catching up with the ‘special and privileged nature’ strategic partnership, giving the clear purpose for the rewiring of the long-term political relations between two nations.

Cooperation in Defense

India is the second largest market for the Russian defense industry. Way back in 2004, more than 70 percent of the Indian military’s hardware came from Russia, making Moscow the chief supplier of defense equipment of the Asian nation. As for now, more than two thirds of Russian exports to India are military goods.

India now has the fourth-largest defense budget – US$50.6 billion in 2016, up from US$46.6 billion last year – followed by Saudi Arabia and Russia, according to the 2016 Jane’s Defense Budgets Report, released by research firm IHS Markit on December, 12.  While Russia was at the fourth place last year, in 2016, it slipped to the sixth position in a list led by the U.S. and China.

Furthermore, the report says that by 2018 India will become the third-largest in the group, surpassing the United Kingdom.

“Procurement spending has been constrained in India over the last three years as personnel costs have increased,” Craig Caffrey, principal analyst, IHS Jane’s, said in a statement. “However, what we expect to see from 2017 onwards is a military focused on modernization. India needs new equipment to fulfill its modernization drive. Over the next three years, India will re-emerge as a key growth market for defense suppliers,” the Quartz India quoted Craig Caffrey as saying.

Earlier this year, during October 8th BREAKS Summit in Goa, India and Russia signed billions of dollars’ worth of military deals. The 16 agreements signed after the talks include three prominent deals on bilateral defense cooperation: Inter-Governmental Agreements (IGAs) for five S-400 ‘Triumph’ air defense missile systems, four Admiral Grigorovich-class (Project 11356) guided missile stealth frigates and a share-holders agreement for a joint venture to manufacture 200 ‘Kamov’-226 helicopters in India.

In November, the Indian Defense Acquisition Council (DAC) had cleared a proposal to procure 464 T-90 tanks from Russia at cost of approximately US$2.1 billion. Almost 2,500 T-72 tanks currently serving the Indian Army need to be replaced by year 2020 but the delay in development of indigenous main battle tank Arjun MK II has forced Indian Army to increase its dependence on T-90s, Sputnik reports.

Now, India plans to induct more than 1,600 T-90 tanks by 2020 that to be deployed in western front bordering Pakistan.

Russia and India also hold exchanges and training exercises between their armed forces annually. An Indian contingent participated in the military parade in Moscow on 9 May 2015 during the 70th anniversary of the victory in the World War II.

The Russian-Indian naval exercises ‘Indra’ Navy-2016 exercises, which are happening right now, “is another milestone in the strengthening of cooperation between the navies of the two countries in the field of maritime safety, and help strengthen the time-tested ties of friendship,” said the Indian ministry press release.

The exercises are being held from December 14 to 21, 2016. The coastal phase of these exercises will be held from December 14-18 in Visakhapatnam. During these exercises, the two naval teams will hold meetings on cooperation, tactical briefings, exchange official visits and receptions, and participate in sports and cultural events, Russian news agency RIA Novosti reports.

The sea phase will happen between December 19 and 21 in the waters of the Bay of Bengal.

Diamond Trade to Add Sparkle to Indo-Russian Ties

russian-indian-tradeIndia is currently the world’s largest cutting & polishing centre for diamonds and one of the ALROSA’s key trade partners. ALROSA, Russian state-own diamond industry monopolist, accounts for 95 percent of national overall diamond output and for more than 25 percent of global diamond production in terms of carats.

According to the Kimberley Process for 2015, India accounted for 37.77 percent of world imports of rough diamonds, slightly higher than the 37.55 percent in 2014. Diamond mining in Russia rose by 9.4 percent in 2015 to 41.9 million carats, worth US$4.24 billion.

Despite the fact that Russia is the world’s largest producer of rough diamonds and India is the world’s biggest manufacturing hub for diamonds, there has not been direct diamond trading between them until recently. Most of the rough Russian diamonds have been reaching India indirectly through Antwerp and Dubai with less than 20 percent of diamonds coming directly to India.

Two years ago, during the 15th India-Russian annual summit in New Delhi, after the talks between national leaders, twelve Indian companies signed three-year contracts worth US$2.1 billion aimed at buying rough diamonds directly from ALROSA beginning 2015. The twelve Indian companies are: Rosy Blue, Diamond India Ltd, Jasani, KiranGems, Shree Ramkrishna Exports, Hari Krishna Exports, KGK, Dimexon, Venus Jewel, Karp Impex, Sheetal Manufacturing and Asian Star.

The B2B deal then was well received by Indian press and expert community.

“The diamond diplomacy will give a much needed lift to B2B ties and involve the private sector in a big way,” Rajeev Sharma, New Delhi-based journalist, wrote in his column at Russia Today.

“Indo-Russian bilateral trade has remained stuck on US$10 billion and has been steadily going down in recent years despite the best political relations between the two countries, and the reason is that there has hardly been any direct trade between the companies of the two countries.”

A special customs zone was created in India in 2015, in the Mumbai Bharat Diamond Bourse, to facilitate direct supply of diamond from Russia. India is trying to further develop the zone to upgrade its rough diamond auctioning mechanism.

According to available statistics, the gem and jewels sector in India employs nearly 3.5 million people of which one million work in the diamond industry alone.

Furthermore, New Delhi is about to enact regulation to end the role of intermediaries in the import of rough diamonds from Russia. According to media reports, Indian Commerce Ministry sources have said that new regulations would relax the restrictive taxation and customs procedure to which Indian companies have to follow when importing rough diamonds.

Since diamonds are set to play a major role in boosting Indo-Russian trade figures, this standardization could infuse the much-required trust in the India-Russia diamond trade.

Total diamond sales to India in November 2016 amounted to US$255.2 million, 63 percent higher compared to the same period last year.

“The market activity at year-end was affected by India’s currency reform in November. One of its effects was a temporary decline in the activity of India’s small and middle-size diamond cutting companies, which also affected the low-end small-size rough diamond segment. Activity in other market segments remains high,” Yury Okoemov, ALROSA vice president, said to the Russian press.

India and Russia has a history of diamond trade going all the way back to the beginning of the 17 century, when merchants from Indian Gujarat came to Astrakhan province of Russia and established trade relations since 1615. According to the Economic Times, an Indian consulate, third of its kind in Russia, could soon be opened in Astrakhan to celebrate the first ever Indian community in Russia.

The Energy-guzzler India and Russia’s Quest for Warm Water Port

The latter set of Russo-Indian energy deals seems to serve both nations needs quite well. The world’s fourth biggest oil consumer, India is seeking to buy assets abroad to ensure energy security amid crude price volatility.

During the St Petersburg International Economic Forum held in June 2016, Russia’s leading oil producer Rosneft signed the contract for the sale nearly 50 percent of its oil field to Oil India, Indian Oil Corporation and Bharat PetroResources. Namely 23.9 percent of Vankorneft field sited in Turukhansky District of the Krasnoyarsk region and 29.9 percent of Taas-Yuryakh Neftegasodobycha located in Sakha Republic of Russia, whereas Rosneft retains 61.1 percent shares in the project.

Russia in her end and long term desire to capture the warm waters port seem to secure her way to the Arabian Sea and into the Indian Ocean though the acquisition of an all-weather, deep-draft Vadinar port in October, 2016.

India’s billionaire Ruia brothers, Essar Group owners, agreed to sell a 98 percent stake in their refinery unit to Rosneft together with Russo-Dutch energy company Trafigura Group and Russian investment fund the United Capital Partners for about US$13 billion.

The Vadinar Port, and its associated facilities including adjoining refinery and 2,700 pumps, spread over some 2,300 hectares. The port receives nearly 70 percent of India’s crude oil imports.

The transaction — which Essar said is the biggest tranche of foreign direct investment in India — was announced on the sidelines of the BRICS Summit, attended by Indian Prime Minister Narendra Modi and his counterpart Vladimir Putin.

As Bloomberg then reported, Prashant Ruia, Essar Group director, told journalists at a briefing in Goa, India, “he doesn’t see sanctions on Russia affecting the deal.”

While the Russian firm Rosneft bought a 49 percent stake in Essar Oil, Trafigura Group and United Capital Partners split 49 percent equity equally. The remaining 2 percent will be held by Ruia brothers.

Such a circuitous route to acquire the port was apparently adopted to bypass Western sanctions against Russia in the Crimean and Ukrainian matters. Rosneft is on the list of companies sanctioned by the US and the EU for Russia’s annexation of Crimea in 2014. Essar Oil would have come on that list if Rosneft would have picked up 51 percent stake.

As Virendra Pandit writes in his blog at The Quint, there is also a national security angle to this Rosneft-Essar deal. “India may have lost a refinery to Russia, but we gained a security cover for another,” Virendra Pandit said while adding that the Jamnagar-based refineries of Reliance were said to be among the targets of Pakistan Air Force during the conflict in the Gulf of Kutch. “In 2016, however, Islamabad dare not target the Russian (Essar) refinery in Jamnagar”, reads the blog.

Russia and India are also accelerating their bilateral civil nuclear energy cooperation. Rosatom already has constructed two nuclear power plants at Kudankulam in south of India as part of a deal signed between Moscow and New Delhi back in 1998. At BRICS summit in Goa, Putin and Modi officially launched the second phase of the Kudankulam Nuclear Power Plant (NPP), currently being built in the Indian state of Tamil Nadu by Rosatom.

The North-South Transport Corridor

The North-South Transport Corridor (NSTC) is an ongoing project between Russia, Azerbaijan, Iran, and India to link the Iranian port of Bandar Abbas by rail to Moscow, cutting transport times between Moscow and Mumbai from 45 days through the Suez Canal to roughly 16-20 days.

Original agreement on building a North-South International Transport Corridor was signed by Russia, Iran and India on September 2000 in St. Petersburg. The agreement entered into force on May 21, 2002. Azerbaijan joined the convention in September 2005.

Agreements reached to finance construction of the final rail segment from the Iranian town of Rasht to the Azeri border town of Astara and the first real cargo haulage along the route was completed on November 2, 2016.

In October 2016, Russian Railways Logistics, together with TransContainer PJSC, Iranian Railways, Azerbaijan Railways and forwarder ADY Express, sent out the first shipment of industrial radiators from Mumbai (India) to the transport and logistics complex in Kaluga region of Russia. The transit time was 22 days. The new route reduces delivery times in half, and offers shippers rates that are 20 percent lower than on the rail route through Turkmenistan and Kazakhstan.

When fully developed, the North-South route will run through the territories of Russia, Azerbaijan, Iran and India, over a length of more than 7,000 km (4,350 miles). The countries-members of the North-South corridor hope, it “will become a multi-modal transportation route for passengers and goods travelling between Russian Northern capital city of St. Petersburg and all the way to the Indian port of Mumbai.”

According to preliminary estimates, the capacity of the railway in the first stage will amount to 1.4 million passengers and 5 to 7 million tons of cargo per year rising to 15 to 20 million tons in future. A total of 22 railway tunnels and 15 bridges will be built along the railway track.

Dezan Shira & Associates can assist with investment into India and Russia. For assistance please email india@dezshira.com or russia@dezshira.com

Please also see our India Briefing website at www.india-briefing.com or visit our firm at www.dezshira.com

 

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