India nudges Russia to address trade imbalance due to discounted oil

India and Russia are discussing a free trade agreement (FTA) involving the Eurasian Economic Union (EEU), leaders of the two countries said on Monday against the backdrop of bilateral economic ties seeing a sharp expansion since the start of the Ukraine war.

Visiting Russian deputy prime minister Denis Manturov, who is also the trade minister, listed India among his country’s “trusted foreign partners” and said the two sides are also working on an agreement to protect investments. External affairs minister S Jaishankar, however, highlighted the urgent need to address the trade imbalance created by the recent increase in two-way trade to $45 billion.

Manturov and Jaishankar were speaking at an India-Russia Business Dialogue hosted by the Federation of Indian Chambers of Commerce and Industry (FICCI) ahead of chairing a meeting of the bilateral inter-governmental commission on trade, economic, scientific, technical and cultural cooperation on Tuesday.

India-Russia trade has witnessed a dramatic increase since last year, driven largely by New Delhi’s increased purchases of discounted Russian crude in the wake of Western sanctions slapped on Moscow over the invasion of Ukraine. Russia has already emerged as one of the top energy suppliers for India, which has not publicly criticised Russia’s aggression and has called for a peaceful resolution of the hostilities.

“We pay special attention to the issues of mutual access of production to the markets of our countries. Together with the Eurasian Economic Commission we are looking forward to intensifying negotiations on a free trade agreement with India,” Manturov said, referring to the executive body of the EEU.

Trade preferences and a mechanism that guarantees protection of investments “will be in demand among Russian and Indian businessmen”, he added.

Jaishankar noted that discussions for an FTA between India and EEU were interrupted by the Covid-19 pandemic, and said the external affairs ministry will encourage resumption of the talks because the proposed pact “will make a real difference to our trade relationship”.

An Indian official who declined to be named said that initial discussions on the FTA with EEU began in 2017 but there had not been much progress due to various reasons, including the pandemic. “There is a renewed push to expedite further discussions on this matter,” he said.

Jaishankar highlighted the fact that India and Russia have already achieved the bilateral trade target of $30 billion before the target year of 2025, and said the increase in two-way trade between April 2022 and February 2023 to $45 billion has given rise to “understandable concern” about trade imbalance.

The two sides need to work urgently to address this imbalance by tackling impediments, including market access, non-rariff barriers, payment-related matters and logistics. The two sides can also diversify and expand the basket of goods by exploring possibilities in automobiles and spare parts, electronics goods, medical devices, solar photovoltaic modules, textiles, food and agricultural products, Jaishankar said.

Both Jaishankar and Manturov tacitly referred to problems created by Western sanctions imposed on Russia, especially in terms of trade settlement. Though India and Russia have agreed on rupee-rouble trade, recent reports have suggested there are problems in making payments to the Russian side, leading to the possible use of currencies of third countries.

Jaishankar said there could be “an inadequate appreciation of the concerns and the risks that the Indian businesses face” on the Russian side, and the future of bilateral economic cooperation requires the willingness and ability to “look at it from the point of view of the other party and come up with solutions which will overcome the obstacles”. He listed payments, logistics and certifications as the key areas.

The payments issue, including expansion of the network under the scheme for international trade settlement in Indian rupees through special rupee vostro accounts, needs to be worked through by the systems of both countries and will be discussed at the meeting of the inter-governmental commission on Tuesday, Jaishankar said.

Manturov said ensuring smooth mutual settlements could give further impetus to trade. At the intergovernmental dialogue on Tuesday, Russia will propose the possibility of “wide use of national currencies and currencies of friendly countries to minimise “expenses and currency risks”, he added.

Russia relies on “trusted foreign partners” such as India for certain components and technologies, and Indian companies can help meet the growing demand in Russia for road construction equipment, chemicals and pharmaceutical products, Manturov said. Indian firms can also benefit from Russia’s “cluster investment platform” that provides preferential credit, insurance premium and income tax preferences for manufacturing priority products.

Manturov also met National Security Adviser Ajit Doval and discussed a range of bilateral issues to implement the India-Russia strategic partnership, people familiar with the matter said.