Alerts & Updates 1st Mar 2022

Russia Sanctions: An Overview of the Impact on India

Authors

Suhail Nathani Managing Partner | Mumbai
Ambarish Sathianathan Partner | Mumbai

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  • The Russia – Ukraine conflict has predictably triggered swift and significant reactive measures from across the globe. Admittedly, some these sanctions were planned (and implied) beforehand and rolled out swiftly to have the maximum impact.[1]

    While these sanctions have been imposed by a few countries (USA, EU, UK) against Russia (and Belarus, in some instances), given the global flow of trade and investments these will have pervasive trade ramifications across the globe. Indeed, the unprecedented and far-reaching nature of these sanctions is best illustrated by Switzerland eschewing its tradition of neutrality to enforce the EU’s sanctions.[2]  This alert briefly assesses this measure and the possible implication for Indian industry.

    The Sanctions are Intended to Isolate Russia from the Global Trading & Financial System

    Denial of Access to the global banking system: Russia has approximately USD 630 Billion in global banks or in Russian banks with a presence in the sanctioning countries. Russian banks’ access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT)[3] System will be curtailed. While the banking entities are still to be named, effectively, this will hamper the ability of anyone with an account (especially the Russian Government) from making foreign currency remittances.

    Private Entities and Banks targeted by SDN Listing: The above actions came in addition to already existing sanctions recently announced by the above countries, such as USA adding multiple Russian parties to its Specially Designated Nationals and Blocked Persons List (SDN List)[4]. Entities listed under this program usually have their assets blocked, and US persons are generally prohibited from dealing with them. Consistent with the broader theme of curbing Russia’s banking channels, some major private and state-owned banks (and their subsidiaries) are also included in this list.

    Individuals Targeted by Sanctions: Other actions include freezing assets of key Russian personnel and limiting their ability to trade or transfer/receive funds. This includes a commitment from USA, UK and EU to implementing sanctions and enforcement mechanisms on additional Russian personnel close to the Russian government including President Vladimir Putin, Foreign Minister Sergey Lavrov, along with various other officials and families. The objective will be to identify and freeze the assets they hold in these jurisdictions.[5]

  • IMPACT ON INDIAN INDUSTRY

    While India’s involvement in the crisis has been limited so far, the rising rate of sanctions could be a cause for concern given Russia’s importance as a military and economic partner for India over the last forty years. A few key areas of interest for India, which could see an impact from the burgeoning list of sanctions, is provided below:

    Defense

    • Russia has been a strategically important military partner for India, primarily because India sources a substantial portion of its military hardware and technology from Russia.
    • Among other concerns, with significant restrictions on the Russian military contractors’ ability to procure key components due to the recent sanctions, their ability to continue supplying to India is curtailed.
    • There are concerns that this could constrain the ability of these suppliers fulfil existing contracts to India such as the S-400 and stealth frigates, amongst others.[6]

    Oil and Gas

    • India is the world’s third-largest importer of oil and has consistently looked to source crude from Russia. India had signed a “first-term contract” in February 2020 for Russian crude oil, with IOC and Rosneft agreeing to a 2 million tonne purchase.[7]
    • Several state-run energy firms have invested in Russian oil and gas blocks. ONGC Videsh Ltd (OVL), Indian Oil Corporation (IOC), Oil India Ltd (OIL) and Bharat PetroResources Ltd (BPRL) are estimated to have invested about $13.6 billion in Russian oil and gas projects – prominent examples being Taas Yuryakh, Vankorneft, License-61, Sakhalin-1 and Imperial Energy.[8]

    Steel and other metals: There is a two-fold impact on the steel sector

    • India has been looking to diversify its coking coal imports in recent years, pursuant to which India and Russia signed an MOU in October 2021 for mining and steel, with a focus on coking coal. The ensuing supplies were meant to mitigate against frequent price fluctuations of coking coal, which have previously caused multiple Indian producers to cut production last year.[9] With growing sanctions, the new supplies may lead to greater roadblocks for these supplies.
    • Russia and Ukraine are estimated to account for 10% of the world’s steel trade. With potential supply disruptions on account of the war and sanctions, there could be a greater demand for Indian steel and engineering goods in the short term, particularly in European markets.[10]
  • Auto Sector     

    • Russia and Ukraine are both key sources in the automotive industry’s supply chain, particularly for semiconductor manufacturing. They provide critical gases and rare earth metals, which are both essential in lithography. Russia is also one of the largest exporters of palladium, another key input for auto part manufacturers.
    • Given that India’s auto sector was just starting to recover from the COVID waves, and still dealing with the ongoing semiconductor shortage, there is apprehension that further scarcity caused by the Ukraine crisis could add to the industry’s short-term difficulties.[11]

    It is important to bear in mind that the Russia sanctions are still evolving in direct reaction to the situation in Ukraine. Many sanctions have been announced but the nuances of implementation are expected to follow.

    In the meantime, the Indian government is also expected to undertake mitigating measures to protect trade with Russia.[12] Indian banks also continue to await directions from the government on how to deal with Russian banks and related transfers.[13] Already, India’s top lender (SBI) has announced that it will not process any transactions involving Russian entities subject to international sanctions in compliance with US and EU regulations.[14]

    There is a possibility that the hostilities on the ground between Russia and Ukraine may end if ceasefire terms are negotiated, though at the time of preparing this alert – Russia’s mobilization and shelling activities continue unabated.

    However, two things are clear: the blocked funds of USD 630 billion will provide a pool for reparation payments, and the sanctions will continue (and increase) until Russia exits Ukraine.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Suhail Nathani, Managing Partner – Email –  suhailnathani@elp-in.com
    Ambarish Sathianathan, Partner – Email ambarishsathianathan@elp-in.com 

  • References

    [1] https://timesofindia.indiatimes.com/business/india-business/explained-how-russia-has-been-preparing-for-a-swift-ban-since-2014/articleshow/89905395.cms

    [2] https://www.bloombergquint.com/onweb/swiss-break-with-historic-neutrality-to-enforce-russia-sanctions

    [3] https://www.bbc.com/news/business-60550610

    [4] https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked-persons-list-sdn-human-readable-lists

    [5] https://www.usnews.com/news/national-news/articles/2022-02-25/u-s-agrees-to-freeze-assets-of-russian-president-vladimir-putin

    [6] https://www.businesstoday.in/latest/world/story/how-will-sanctions-on-russia-impact-indias-defence-deals-with-moscow-324113-2022-02-27

    [7] https://www.financialexpress.com/economy/western-sanctions-on-russia-to-have-marginal-impact-on-indias-trade/2445084/

    [8] https://www.hindustantimes.com/india-news/russia-sanctions-may-not-hit-indian-trade-101645813222884.html

    [9] https://www.livemint.com/news/india/india-seeks-alternatives-for-russian-coking-coal-imports-11645814163205.html

    [10] https://economictimes.indiatimes.com/news/india/sanctions-may-boost-local-steel-engineering-goods-specialty-chemical-companies/articleshow/89811032.cms

    [11] https://www.businesstoday.in/latest/economy/story/russia-ukraine-war-auto-sector-braces-against-rising-fuel-and-commodity-prices-323817-2022-02-24

    [12] https://timesofindia.indiatimes.com/business/india-business/india-explores-setting-up-rupee-trade-accounts-with-russia-to-soften-sanctions-blow/articleshow/89826929.cms

    [13] https://economictimes.indiatimes.com/industry/banking/finance/banking/indian-banks-await-government-orders-on-dealing-with-russian-lenders/articleshow/89882187.cms

    [14] https://timesofindia.indiatimes.com/business/india-business/sbi-stops-handling-trade-with-sanctioned-russian-entities-sources/articleshow/89906512.cms

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.