Tightrope Walker Modi
Prime Minister Narendra Modi’s visit to Moscow attracted significant attention amidst the formation of the “axis of evil” between Moscow, Tehran, and Pyongyang. This is because India currently seems like the ideal hub for fuelling the Russian war machine with petrodollars and supplying sensitive goods to the Russian military-industrial complex. However, there is good news: India is still part of the QUAD framework, which includes a quadrilateral dialogue between India, Japan, the US, and Australia. The next QUAD meeting is scheduled for the second half of July and later this year.
Trade between India and Russia appears quite audacious. According to the Monitoring Group on Sanctions and Freedom of Navigation, in May 2024 alone, India imported approximately $3.8 billion worth of Russian oil. Overall, India purchased half of all crude oil from Baltic ports and 40% from Black Sea ports, amounting to 7.1 million tonnes. The average price was $73.9 per barrel, exceeding the $60 per barrel price cap set by the G7 countries.
In addition, massive volumes of electronics of various kinds are imported from India to Russia, both of domestic production and from other countries, including G7 nations. Overall, this makes India a highly valuable trading partner for Moscow. Therefore, it is no surprise that Narendra Modi received the warmest welcome from Vladimir Putin, who even awarded the Indian leader the highest Russian civilian honour—the Order of St. Andrew the Apostle.
Given that India clearly functions as a hub for circumventing sanctions against Russia, it is understandable that this visit and its outcomes have caused considerable irritation not only in Kyiv but also in Washington. The smiles and embraces of the Russian and Indian leaders were particularly cynical against the backdrop of the horrific missile attack on Ukraine on 8 July, which killed dozens of Ukrainian civilians on the very day the Russia-India summit began.
“Today in Ukraine, as a result of a brutal Russian missile strike, 37 people, including three children, were killed, and 170 were injured, including 13 children. A Russian missile hit Ukraine's largest children's hospital, targeting young cancer patients. Many were buried under the rubble. It is deeply disappointing and a devastating blow to peace efforts to see the leader of the world’s largest democracy embracing the world's bloodiest criminal in Moscow on such a day,” wrote Ukrainian President Volodymyr Zelensky on X (formerly Twitter) that day.
On 12 July, India’s National Security Advisor Ajit Doval held a phone conversation with US National Security Advisor Jake Sullivan. According to India’s Ministry of Foreign Affairs, they "discussed a wide range of bilateral, regional, and international issues and upcoming high-level meetings within the QUAD framework, which will take place in July 2024 and later this year."
Photo: Narendra Modi received the highest Russian civilian order – the Order of St Andrew – from Vladimir Putin. Source: Narendra Modi on X (formerly Twitter)
A Very Special Trade
On one hand, India is the most populous country with a considerable economy, its GDP ranking fifth in the world, but with rather limited natural resources. On the other hand, Russia has colossal natural resources, a relatively small population, and a GDP one and a half times smaller than India’s. Adding the most critical ingredient to this mix, which makes it explosive, is the aggressive war waged by Russia, for which it has received extensive economic sanctions from G7 countries.
During Modi's visit to Moscow, he and Putin announced plans to increase bilateral trade to $100 billion by 2030. As of 2023, trade between the two countries amounted to $57 billion. "Today, Russian-Indian relations are characterised by a special privileged strategic partnership. This is confirmed by the figures: in 2023, trade between our countries increased by 60% and reached $57 billion, and in January-April of this year, it added another 23% and approached $18 billion," said First Deputy Prime Minister Denis Manturov in a recent interview.
Thus, 2023 was a revolutionary year in foreign trade between Russia and India. The reason is clear: India has assumed the role of a hub for circumventing sanctions against Russia imposed by the G7 countries. Furthermore, according to the outcomes of the meeting between Putin and Modi, the countries will expand mutual trade to reach $100 billion by 2030, as mentioned earlier. To achieve this, they plan to develop a bilateral settlement system in national currencies and prepare a free trade and industrial cooperation agreement. Notably, this was the first visit to Russia since 2019 and the first "annual" summit in three years, marking the first visit since the start of Russia's full-scale invasion of Ukraine.
Key exports from Russia to India include oil, coal, coke, fertilisers, and petroleum products. The volume of these exports has multiplied since the beginning of Russia’s invasion of Ukraine and seems likely to continue growing, particularly oil, fertilisers, and coal. These plans cannot be realised without transitioning to rupees and rubles in mutual trade, given Russia's sanctions.
Photo: Settlements in rupees are a loophole for Russia to avoid sanctions. However, the rupee is not considered a truly convertible currency. Source: Vajiram & Ravi
The Rupee as an Anchor
In May, there was an almost crisis-like situation between India and Russia concerning bilateral trade settlements in rupees. Indian importers of Russian oil and coal wanted an effective mechanism for payment in rupees. However, there is a significant trade surplus between the two countries in favour of Russia. That is, India imports much more from Russia than it sells to Russia. By the end of 2024, this surplus in rupees could exceed $40 billion. These funds are essentially lying dormant or could be used for re-exporting goods needed by Russia from third countries via India. However, using rupees for re-exports burdens India's balance of payments, something it is not particularly interested in.
The problem is that payments in rupees are a loophole for Russia to avoid sanctions. However, the rupee is not considered a fully convertible currency. Moreover, India’s share in global trade exports is about 2%, meaning other countries are not particularly interested in rupees. Therefore, Russia is interested in receiving currencies other than rupees, such as Chinese yuan, to circumvent sanctions.
Nevertheless, during Modi’s visit to Moscow, an agreement was reached to promote a bilateral settlement system in national currencies. The parties will also hold consultations on the compatibility of their financial messaging systems, seeking an alternative to the global SWIFT system, from which Russia could be completely disconnected at any moment. "The parties agreed to continue cooperation to promote a bilateral settlement system using national currencies. The parties agreed to continue consultations on the compatibility of their financial messaging systems," the Kremlin stated following the summit.
Indian banks and companies face the risk of secondary sanctions if this friendship warms further.