The events of the past few weeks – Russia’s annexation of regions of Donetsk, Luhansk, Zaporizhzhia and Kherson, attacks on the Nord Stream 1 and 2 pipelines and mobilization of reserves in Russia – indicate that the Ukraine-Russia induced crisis is far from over. The attack on the two pipelines indicates that there is an interest that wants the energy rift between Russia and the EU to become permanent. The G7 countries intend to impose price caps on Russia’s global oil exports[1]. And Russia remains under extensive sanctions by the US[2] and the EU[3].
These sanctions prohibit a wide range of transactions, from the sale of technology and equipment to provision of financial services to the targeted entities which are typically individuals and companies linked to the Russian government. Most of Russia’s defence manufacturers have been under US sanctions since 2014. India officially doesn’t recognize unilateral sanctions (those not imposed by the UN). However, what makes America’s sanctions effective is the central role played by the U.S. dollar in international finance. Commercial enterprises violating these sanctions lose access to the U.S. financial system, finishing them off as a viable business. Unilateral sanctions imposed by the U.S. work.
Sanctions once imposed tend to stay for a long time. Iran has been under some form of sanction since its 1979 revolution, while Venezuela has been under various sanctions for nearly two decades. However, Russia is much larger than either Iran or Venezuela, and is less likely to suffer the intended economic collapse. It will remain a major player in the international community and a factor in the world economy.
For India, this presents a problem. Russia is far too big and important to be locked out of global commodity markets, whether it is oil and gas, food, fertilizer, or minerals required for India’s current and future requirements. Sharp fluctuations or high prices, as witnessed over the past year, are certain to materialise if Russian commodities are actually barred from global markets, will hurt India, especially its vulnerable poor. As a large source of India’s defence hardware, cutting off trade will hamper India’s defence preparedness.
For India, the problem therefore boils down to continued trade and investment in natural resources and defence sectors for the next 20-25 years. This is the narrow question faced by India for the long term.
How can India proceed? Two ways, one short term and one long term.
In the short term, first India needs to develop an expertise on sanctions – a detailed understanding of how they work, finding loopholes and workarounds. Sanctions are not a blunt instrument with ON/OFF settings. Some activities may be prohibited, but many other activities can still be carried out. For instance, investments in Russian shale and Arctic deep-sea oil are sanctioned, but buying Russian oil generally is not. Because not every entity operating out of Russia has been sanctioned, so a lot of trade is still possible[4].
Second, India must move now to create its own financial architecture, which is separate from the SWIFT network used for international payments. Companies and individuals using the home-grown alternative cannot be targeted by the U.S. Many countries already have an alternative to Swift, yet unused, and India’s National Payments Corporation is getting there, with its already successful payments gateway. There are several public sector banks not linked to SWIFT, like UCO Bank, which has been used for payments to Iran in the past. There are many parts of this network that exist: some public sector banks which are not linked to SWIFT.
For the long run, India must create its own benchmarks and commodity exchanges for petroleum and other commodities. Resource trading on an Indian exchange, in Indian currency, using an Indian financial architecture, will be largely immune to coercive tactics, currently on global display[5].
Amit Bhandari is Energy, Investment and Connectivity, Gateway House
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References
[1] https://www.bundesfinanzministerium.de/Content/EN/Downloads/G7-G20/2022-09-02-g7-ministers-statement.pdf?__blob=publicationFile&v=7
[2] https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information/ukraine-russia-related-sanctions
[3] https://www.sanctionsmap.eu/#/main
[4] https://www.gatewayhouse.in/u-s-sanctions-russia-impact-india/