India's economic leverage: Freezing Russian funds and shaping trade dynamics

Negotiations between India and Russia over unsettled bills for Russian oil, which spanned over a year, ended unsuccessfully for the Kremlin. According to reports by "The Hindu Businessline," none of Moscow's proposals came to fruition. This outcome was unexpected and represents a significant setback for Putin.

"It has been decided that the funds of Russian companies will remain in India," "The Hindu Businessline" states, quoting a well-placed source.

It's important to note that Russia has emerged as a major supplier of oil to India, sometimes referred to as "bloody oil" by journalists. Due to transactions in national currencies, Russia has amassed a substantial amount of Indian rupees, which it finds difficult to utilize.

In November 2022, a Russian delegate visited New Delhi, showcasing a catalog of approximately 500 products Russia was interested in importing from India. This list ranged from automotive components like pistons and oil pumps to textile machinery and materials and numerous metallurgy products. Despite a follow-up visit in January 2023, no progress was made.

Despite a 33-fold increase in its purchase of Russian crude oil since the conflict began—making India the second-largest buyer of Russian oil—the country has scarcely exported goods to Russia. Exports to Russia in 2023-2024 amounted to a mere 4.26 billion dollars, juxtaposed with imports from Russia at 61.44 billion dollars.

This significant trade imbalance has led to Russian companies in India accruing rupees at 3 billion dollars a month, as estimated by Bloomberg Economics. Yet, Russia is unable to utilize these funds. Sergey Lavrov, Head of Russian Diplomacy, acknowledged this issue some time ago.

Now, it appears this issue will remain unresolved. "The Hindu Businessline" reports that the outstanding rupee funds, valued at billions of dollars, will be invested into the Indian economy. Among the projects funded by the Russian capital is the construction of Vande Bharat trains for Indian railways.

Bloomberg previously reported attempts by Indian refineries to settle Russian oil payments in various currencies through banks in the United Arab Emirates and the opening of special rupee accounts in major Russian banks like Sberbank and VTB Bank to facilitate trade.

"The trade imbalance for Russia implies that the volume of frozen assets could total tens of billions of dollars," Alexander Knobel, a member of Putin's government, told Bloomberg. He also noted that "the situation is exacerbated by India's historically high aggregated trade deficit, which limits settlement options with third countries."

Earlier in the year, it was reported that India hesitated to continue purchasing Russian crude oil without the discounts previously offered. They started reducing orders and seeking other suppliers, forcing Putin to consider concessions. India, recognizing its importance to Russia, has been adamant in its demands, contrary to some experts' expectations of a compromise.

However, by the end of last year, India's strategy became evident as it substantially cut back on imports of Putin's "bloody oil." In December, Russian oil imports fell to the lowest in 11 months, with a 16-22% reduction, as Reuters reported.

Russian media speculated that these reductions were due to rupee payment issues. Yet, this was contradicted by Indian Oil Minister Hardeep Singh Puri, who clarified, "There's no problem with payments. It all boils down to the purchasing price for our refineries," as quoted by The Economic Times. He highlighted that without attractive discounts from Russia, India had little incentive to buy.

"The Economic Times" also referenced government data indicating that in November 2023, Indian refineries paid the highest price in a year for Russian oil, at an average of 85.90 dollars per barrel.

Now, with a portion of the funds earmarked for limited supplies remaining in India, these resources will not fund the Kremlin's military actions in Ukraine.