HomeIndia NewsWhat will be the effect of sanctions on Russia on India?

What will be the effect of sanctions on Russia on India?

Author: Anupam Manoor
Western countries have frozen the foreign assets of Russia’s central bank, imposing the toughest sanctions ever on Russia. Russia has foreign exchange reserves of $ 630 billion. Of this, $300 billion is kept in the US central bank, the Federal Reserve and the European Central Bank (ECB). Blocking access to this amount would be a severe blow to Russia. Another important restriction imposed by Western countries is that they have taken Russian banks out of the SWIFT network. This network plays an important role in international payments. SWIFT ie Society for Worldwide Interbank Financial Telecommunications is an international messaging system. Through this, banks communicate with each other in a secure manner and money is transferred from one country to another in a secure manner. It has 11,000 international banks as its members.

effect of restrictions
The exit from SWIFT meant that many Russian banks would be left out of the international financial system. This will make it difficult for them to operate on a global scale. In such a situation, Russia will not be able to pay for the imports. Nor will anyone else be able to pay him for exports through the normal route. It is worth noting that the Russian economy is largely dependent on oil exports. Its contribution to its GDP is 15-20 percent. At the same time, the contribution of total exports to GDP is close to 30 percent. Its economy will be badly hit due to its impact.

A batch of Indian students stranded in Ukraine reached Delhi on Sunday. (Photo: ANI)

When Russia annexed Crimea from Ukraine in 2014, it was still under economic sanctions. At the time, the former finance minister of Russia had said that sanctions could shrink Russia’s GDP by 5 percent. We can also imagine the impact of the removal of Russian banks from SWIFT with the example of Iran. When Iran was pulled out of SWIFT, oil export earnings fell by 50 percent and total exports fell by 30 percent.

The Ukraine war will have an impact on India along with other countries of the world, even though Russia and Ukraine are not India’s major trading partners. The imposition of sanctions on Russia has affected the supply of oil globally. Due to this, crude oil may become more expensive in the coming time. This is the biggest concern of India at the moment. This will cost India more dollars for imports. Therefore, the current account deficit will increase because India buys 80 percent of its crude oil from other countries. If petrol and diesel become expensive due to the increase in the price of crude oil, then it may increase the price of other goods in the country. This will be bad news for the Indian economy, where retail inflation is already over 6 per cent.

Exclusion of Russian banks from SWIFT will also have an impact on India. Bilateral trade between the two countries is $11.9 billion. India exported $3.3 billion to Russia in 2021. Medicines contributed the most to this. India imported $8.6 billion from Russia last year, which included crude oil, petroleum products, coal, fertilizers, gold, precious metals and other metals. It could also have an impact on India’s arms deals. Russia is the largest arms supplier to India. Its contribution to India’s total arms imports is more than half. But can bilateral trade between India and Russia continue while avoiding these restrictions?

Economic sanctions were also imposed on Russia in 2014. After that India and Russia had found a way to trade in their currencies. India still pays a share in bilateral trade in rupees and not dollars. Even in the future, India will have some way to escape from these restrictions. India and Russia can use their national currencies for bilateral trade. Or for this India can use the route it used to trade with Iran. Trade between India and Iran was done through an account opened in a public sector bank, in which money was deposited in rupees.

India’s options
However, after the 2014 sanctions, Russia has developed the SPFS system like SWIFT. Some Indian banks may join this to continue bilateral trade. In addition, the new digital currency issued by the central banks of the two countries can also be used for trade. But here you have to be careful about two things. First, none of these options have been tried or tested. Second, these systems are not fully prepared. So there is uncertainty associated with them.

The biggest thing is that India’s stand on the war has been neutral so far. So if it ignores global sanctions for trade with Russia, it will send a wrong message to allies of the West. They will feel that India is taking the side of Russia. With this America and Europe can take tough steps against India. India would hardly want to take such a risk.

(The author is Assistant Professor, Takshashila Institution)

Disclaimer: The views expressed above are those of the author.

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