India And Russia Need To Diversify Their Economic Relationship But Structural Constraints Remain

President Putin has just concluded another successful Summit meeting with PM Narendra Modi from 4-5 October in New Delhi. Despite the threat of CAATSA sanctions by the USA, the two sides went ahead and inked the agreement for the purchase of 5 sets of batteries of S-400 missile defence systems.

As a matter of fact, Indo Russian relations are nowadays seen mainly from the prism of a buyer seller relationship in the defence field. The fact that the two sides have also made all round progress in other areas over the years is normally forgotten or overlooked, due to the military and defence relationship which overshadows all other exchanges. This Summit also saw 8 non-defence agreements being signed. These include an MOU between ISRO and ROSCOSMOS for joint activities in the field of human spaceflight programme being under taken by India, an MOU between the railways for collaboration, and yet another one by the Indian Railways with the Russian ministry of economy for transport education, an MOU between small scale industries, cooperation in fertilizers,cooperation between NITI Ayog and Ministry of Economic Development of Russia and a Protocol for Consultations between he two foreign ministries between 2019 and 2023. 

India’s trade with Russia crossed $10.7 billion last year, witnessing a 21.5% growth, but there is room for much more. The leaders have set a target of US$30  billion in bilateral trade by 2025. A target of US30 billion had been set for bilateral investments by 2025, but has been achieved already. The two sides have now set a new target of US$ 50 billion in bilateral investments by the same date. Russian companies have invested US$ 12.5 in the oil sector in Gujarat itself. To further facilitate India Russia relations, the “Russia Plus” initiative --- a one stop solution for Russian business in India--has been started, and a joint working group has been set up.

At the Indo Russian business meet attended by the two leaders on 5 October, where 100 business persons were present, Prime Minister Modi pointed out that Russian businesses could take part in the Sagarmala project, metro projects, and new and renewable energy and nuclear energy, infrastructure and pharmaceuticals. President Putin highlighted opportunities for trade in energy, digital economy, infrastructure and startups. PM Modi has been invited as the Chief Guest for the 2019 Eastern economic Forum. Indian firms have already invested US$ 10 billion in Russian oil fields out of an overall investment of US$ 13 billion. Several Indian oil companieshave acquired stakes in Rosneft’s oilfields. In October 2016, ONGC Videsh limited (OVL) completed the acquisition of an additional 11 percent stake in the Vankor oilfield for US$930 million, in addition to the previously acquired 15 percent stake for $1.26 billion. This development has given a big push to Indian investments in Russia.

Indian energy firms are eyeing a stake in Okhotsk seas as well as developing the LNG Project in Russia, andthe two sides are also looking at the possibility of building a gas pipeline from Russia to India to supply energy.  The Russian Direct Investment Fund, Indian Potash and producers of phosphate containing fertilizers Phos Agro announced joint investments in mineral fertilizer production in Russia and India.

Other areas of collaboration, which figured prominently in the joint statement between the two sides, are nuclear reactors, investments by Indian diamond companies in Russian Far East, and “joint collaboration in precious metals, minerals, natural resources and forest produce, including timber, through joint investments, production processing and skilled labour’. The review of priority investment projects in the spheres of mining, metallurgy, power, oil, and gas, railways, pharmaceuticals, information technology, chemicals, infrastructure, automobiles, space, shipbuilding and manufacturing of different equipment reflects a focus on the desire for diversification. PMModi has invited Russian companies to set up industrial parks in India for defence manufacturing.

Russia is already supplying liquified natural gas to the LNG terminal in Dahej, and the Rosneft company (as part of an international consortium) has acquired Essar Oil last year for US$12.9 billion. Reliance and its Russian partner Sibur are building a butyl rubber plant in Gujarat, which will start production by 2019. Russian railways is already studying the feasibility of the Nagpur-Securderabad high speed rail project. The Green Corridor, North South transport corridor and the India Eurasia Economic Union FTA could also add to trade and investments. There are thus, many far reaching initiatives aimed at expanding economic cooperation between the two countries.

 Overall, Indo Russian trade and investment ties outside the defence realm have been below potential as it has primarily been a buyer seller relationship and not one based on collaborative  investments. Defence, hydrocarbons and nuclear power are areas where Russia will be the net beneficiary in the long term, and to ensure balance, sectors such as IT, pharmaceuticals and healthcare should also be encouraged.

Russia can also contribute to the “Make in India” programme, to infrastructure,  space technologies, as well as to the Smart Cities and Digital India initiatives. Expediting pipelines for direct gas delivery from Russia to India, as well as early operationalisation of the proposed $1 billion fund through India’s National Investment and Infrastructure Fund and the Russian Direct Investment Fund for investment in infrastructure and technology projects will be helpful. Indian businessmen need to look beyond Moscow and St Petersburg and the larger cities, and explore Russian regions which are rich in natural resources, have a well-developed infrastructure and are keen to establish business relations with India.

The Russian ban on import of fruits, vegetables, meat, fish, milk and dairy products from the US, EU Australia and Canada has provided an opportunity for Indian companies over the last few years. Russia now also imports buffalo meat from India. Russia needs to consider specific manufacturing projects in India. India has invited Russian participation in the Delhi-Mumbai industrial corridor, and the dedicated freight corridor along with the Bangalore-Mumbai Economic Corridor and the Chennai-Bangalore Industrial Corridor. Russian companies must seriously look at these possibilities.

The visa regime is still not satisfactory and a visa facilitation agreement between the leading chambers of commerce of the two countries can solve this issue.  The international North-South corridor via Iran is not a new idea-- it has been discussed at least for the past fifteen years-- but the two sides still talk about how it could be implemented effectively. This requires a special joint working group which will monitor the implementation of the corridor.

Russia is an attractive destination for India for high end software development and energy investment mainly due to low cost structure and high literacy rates. Indian interests in Russia have been mostly limited to defence, nuclear and heavy industry which needs diversification. The leading sectors attracting investments from Russia are chemicals, telecommunications and trading and consultancy services. This neds to be expanded and diversified.

India also offers Russia enormous potential in infrastructure, metallurgy, real estate, pharmaceuticals and other sectors.It would also help if trade could partially take place in local currencies. This needs to be looked at seriously, given the past successful record of Rupee Rouble trade, and the current issues facing Russian entities due to US and Western sanctions, especially in the defence field. There is little doubt however, that if the Indo–Russian relationship is to be sustained and taken to new highs , trade and investments in the non- defence sectors needs to be diversified and strengthened, and the barriers removed as quickly as possible. 

Anil Wadhwa is former Secretary (East) in the Ministry of External Affairs and has been the Indian Ambassador to Italy, Thaiiland, Oman and Poland. He is currently a Senior fellow with the Vivekananda International Foundation. Views expressed here are personal.