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Indo-Russian Economic Ties: Advantage Russia

Given the stagnant Indo-Russian bilateral trade and increasing difficulties in military and technological cooperation, the recent visit to India of Russian President Dmitry Medvedev may help to restore a relationship that has cooled since the collapse of the Soviet Union.

COMMENTARY

Indo-Russian Economic Ties: for 12%-14% of India’s total foreign trade. But India-Russia trade and economic rela-
Advantage Russia tions have undergone major changes during the last nearly two decades after the Soviet break-up. So far as the volume of total trade turnover between India and
R G Gidadhubli Russia is concerned, as per data published

Given the stagnant Indo-Russian bilateral trade and increasing difficulties in military and technological cooperation, the recent visit to India of Russian President Dmitry Medvedev may help to restore a relationship that has cooled since the collapse of the Soviet Union.

R G Gidadhubli (rgidadhubli@hotmail.com) is a commentator on Russian and Central Asian Affairs.

Economic & Political Weekly

EPW
january 17, 2009

T
he two-day official visit of the Russian President Dmitry Medvedev to India in the first week of December 2008 to discuss bilateral ties, amid the global financial crisis and in the aftermath of the recent Mumbai attacks, is significant. In all 10 agreements were signed in areas covering civil nuclear cooperation, economy, defence, tourism, space and combating terrorism. There was reaffirmation of the strategic partnership between the two countries based on “strong mutual trust, confidence and convergence of interests”. This is evident from the signing of the nuclear accord which opens a new chapter in the time tested multifaceted relations between India and Russia. To name a few items covered by this agreement: Russia will give 80 Mi-17 Hip military transport helicopters to the Indian Air Force; build another four reactors at the Koodankoolam nuclear power plant; supply nuclear fuel worth $700 million to Indian nuclear power plants and so on.

While cooperation in the field of d efence continues to be significant in the relations between the two countries, there are p ersistent differences between India and Russia, like for example on the issue of pricing of the refitted Soviet era aircraft carrier Admiral Gorshkov; the Russian Shipbuilding Corporation has been demanding more than twice the original price of $1 billion. The visit of the Russian president might facilitate in settling the differences. Needless to add Russia needs money, being affected by the global financial crisis, and at the same time does not want to lose its monopoly position in the Indian defence market which is one of the largest for Russia.

Balancing Export-Import

It is a matter of concern that despite the close and cordial political relations, trade and economic relations are far below the potential. Looking back, the former Soviet Union (FSU) was one of the most important trading partners for India accounting by the Centre for Monitoring Indian Economy, it has increased from $2.4 billion in 1992 to $2.8 billion in 2007, which means a virtual stagnation in about 16 years. According to some analysts, trade is expected to increase over $4 billion in 2008. The analysis of India’s exports to Russia and India’s imports from Russia reveals a very contrasting picture. India’s exports to Russia which were valued at $1,640 million in 1992, declined to $631 million in 2004, rising to $907 million in 2007. Thus India’s exports to Russia were the lowest in 2004 and it was hardly 40% of the value of exports on the eve of the Soviet breakup. In fact, India’s poor performance in Russia’s import trade is in sharp contrast to that of China. While in 1991 India’s e xports to the FSU was higher than that of China, in 2007 China recorded 9.7% of the $260 billion total imports of Russia as per the World Fact Book. This may be due to a variety of reasons – complexities in the utilisation of the rupee-debt repayment funds of the Soviet era; multiplicity of trade and payment channels such as rupee trade, hard currency trade; increasing role of “shuttle traders” (fly-by-night operators) often resorting to unfair trading practices in the 1990s; trading in goods of substandard quality; dumping of low quality goods to make quick profits; role of mafia e lements in Russia; economic crisis conditions prevailing in Russia in the 1990s; growing competition in the Russian market during the last several years and so on.

In contrast to India’s poor export performance in the Russian market, Russia has performed better in the Indian market. Russia’s exports to India have increased by nearly four times from $517 million in 2000 to $1,940 million in 2007. In 2008 as per some estimates, Russia’s exports to I ndia might exceed $3,000 million. This has put Russia in an advantageous position in trading with India.

A major change in India-Russia trade has been that while India earlier consistently enjoyed a surplus trade balance with

COMMENTARY

the FSU, since 2003 there has been a negative trade balance with Russia. Hence I ndia has to make net payment of more than $2 to 3 billion per year to Russia i ncluding payment for defence goods.

Commodity Composition: There have been dramatic changes in the commodity composition of India-Russia trade. Exports of traditional goods, such as tea, coffee and textiles, have drastically declined as India has been facing competition from countries such as Sri Lanka, China and Brazil, which have entered the Russian market in a big way with specific brands to successfully capture the market. Perhaps India has failed to adopt a similar strategy. At present major items of exports from India to R ussia are drugs, pharmaceutical products, fine chemicals, etc. In the case of pharmaceutical products there was a major increase in India’s exports to Russia. Medicines, pharmaceuticals and fine chemical items are the only major groups, which have maintained growth in exports to Russia from $109 million in 2000 to $271 million in 2007, say nearly threefold increase in seven years. I ndia’s leading pharmaceutical companies such as Dr Reddy’s Laboratory, Ranbaxy, GlenMark, Lupin, etc, have played an important role in this regard. India’s exports to Russia include generic products and medicines such as HIV and anti-tuberculosis drugs, and medicines to fight against what are known as the “richman’s diseases”. Indian medicines are 50% to 60% cheaper than comparable items from west Europe and hence advantageous to Russia.

Problems Affecting India’s Exports

There are several problems affecting India’s exports to Russia – perception of high risk factor prevailing among the Indian traders about the Russian market and the “information gap” about trading institutions and business opportunities in different regions of Russia. There are also some other constraints that affect India’s exports to Russia. For instance, respondents to a Federation of Indian Chambers of Commerce and Industry (FICCI) survey conducted in 2007 pointed out that the insurance market in Russia has not been adequately developed and there are hardly any products that provide insurance cover for stocks and raw materials. In dealing with their counterparts in Russia, some Indian businessmen often feel the Russian payment system involving letters of credit is ineffective.

Even though India’s exports of drugs and medicines have increased, it takes about two years even for reputed Indian pharma companies to get approval for g eneric pharmaceutical products in Russia, while European firms get it in about one year. Moreover, Indian exporters face a major problem of delays and difficulties in getting Russian visas. There is a long d uration of about two to three months alongside the high cost for transportation of goods to be exported from India to Russia. This constraint can be overcome if the proposed North-South corridor via Iran and the Caspian Sea can become a reality. But there was no mention about this issue during the visit of the Russian president. In contrast to the problems facing Indian firms, Russian companies in general have not faced such major problems in exporting their products to India. This is partly because Russia continues to deal with state sector units and government bodies dealing with defence equipment. Hence Russian companies do not face problems of “information gap” – lack of information about the customer and payment delays from the Indian side and so on. Moreover, many Russian firms which export machinery and equipment to India, for instance, power equipments to the Tehri hydropower plant, machineries for construction sites, for metallurgical and chemical plants, etc, deal with the public sector units as was the case during the Soviet era. This has helped Russian companies to increase exports to India.

Scope and Challenges

No doubt there is scope and opportunity for increasing bilateral trade considering the fact that both the countries might sustain moderate growth despite global problems. Moreover, the policymakers of both India and Russia have taken policy decisions and measures from time to time in order to promote trade and economic ties between the two countries. There have been mutual exchanges of visits on a regular basis at all levels including at the highest political levels, as was the 4-6 December visit of Medvedev, during which joint declarations were signed and even trade

targets fixed. In November 2007, during

the visit of the then Russian prime minister

to India, the second session of the India-

Russia Economic Forum on Trade and

Investment was held which was attended

by over 500 business representatives of both

countries from public and private sectors.

India’s leading trading organisations such

as FICCI, Confederation of Indian Industry

and the Associated Chambers of Com

merce and Industry of India were repre

sented in these meetings. Hence this event

was expected to provide a fillip to the

“B2B” (business to business) interaction

between the two countries and a Joint

Task Force has been constituted to moni

tor the implementation of the recommen

dations of the Joint Study Group and to

push trade and economic ties to new

heights by removing the impediments to

bilateral trade and commerce.

There are some positive developments

during the last few years. With implicit co

operation of Russian authorities several

Indian companies have invested in Russia

in diverse fields, such as energy, informa

tion technology (IT), pharma, telecom,

manufacturing, etc, even as there has

been general criticism by some western

analysts about the poor investment

c limate in Russia. For instance, India has

invested over $1 billion in Sakhalin-3, the

India-Russia joint venture for exploration

of oil in Siberia, which is one of the largest

investments. In November 2008 India’s

Petroleum Minister Murli Deora met the

Russian leaders to increase India’s stake

and share in their energy sector. Similarly,

one of India’s largest software company,

Tata Consultancy Services has opened a

representative office in Russia in March

2008. More than a hundred Indian com

panies have been registered in Russia, a

majority of which are trading companies.

More importantly, some leading Indian

pharmaceutical companies have also

opened their establishments in different

parts of Russia which has made a positive

contribution to enhancing trade and

e conomic ties between the two countries.

Hence Indian reputed pharmaceutical

firms with established R&D facilities can

further increase exports from the present

3% to 10% of Russian pharma market of

$9 billion if the regulatory mechanism

could be modified by the concerned

january 17, 2009

EPW
Economic & Political Weekly

COMMENTARY

R ussian authorities. In comparison to this, investment by Russia in India is much less. The Russian ambassador to India V yacheslav Trubnikov admitted in 2006 that Russian investment of $160 million was less than 1% of total investment over the last decade, while India’s investment was large amounting to over $2,000 million, mostly in large projects in Russia. Moreover, some analysts have observed that as Russia was not able to utilise the r upee debt repayment funds for importing goods from India it was converted into e quity in Indian companies, which is a dvantageous to Russia.

Thus, in lieu of a conclusion it may be stated that during the last about 17 years while India’s exports to Russia have m arginally increased, Russia’s exports to India have increased substantially resulting in huge negative trade balance for I ndia. So far as traditional commodities

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are concerned, India has lost its share and position in the Russian market that it enjoyed in the Soviet era. Indian exporters do face several problems and constraints in the Russian market unlike Russian companies trading with India. Even as there are few challenges to face, investments by several Indian entrepreneurs and firms in Russia in energy, IT and pharmaceutical sectors are much more than that of Russian b usinessmen in India.

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Economic & Political Weekly

EPW
january 17, 2009

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