Russia-Ukraine Crisis: Indian Exporters Find Themselves Caught In The Crossfire

Even before the harshest of sanctions ⁠hit, trouble had started to build for those in India doing business with Russia.

On Friday evening, two days after Russia began attacking sites in Ukraine, Rakesh Shah, director at Nipha Exports in Kolkata, received an email from the Export Credit Guarantee Corporation of India. It read as follows:

Country: Russia

Present Rating and Type of Cover: B1, Open Cover

Revised Rating and Type of Cover: B2, Restricted Cover Country-I

Simply put, it meant that export credit guarantees for exports to Russia would now be approved only on a case-by-case basis and not as freely as it was before. This was done to account for the rising risk in the region, the government said in a release while clarifying that the cover has not been completely withdrawn.

The ECGC provides credit insurance schemes, which, in return for a premium, provides insurance cover against payments due from foreign buyers. This gives banks greater comfort to provide export credit facilities.

With the change in rating, Nipha Exports, which ships engineering equipment to a number of countries, including Russia, finds itself stranded.

"We were exporting to companies in Russia on credit and need risk cover," Shah told BloombergQuint. With the risk cover now being provided on case-by-case basis, it is cumbersome for exporters to book orders, Shah said. Existing credit guarantees provided on orders already booked are not impacted.

That was only the first sign of trouble.

Over the weekend, Western nations doubled down on sanctions against Russia as it persisted with its invasion of Ukraine. Harsh and previously unused measures, like strictures on the Russian central bank's foreign exchange reserves and curbs on a few large Russian banks from using the SWIFT messaging system for international payments, were put in place.

Nipha Exports has payments amounting to €50,000 due from clients in Russia, Shah said.

The exclusion of large Russian banks from the SWIFT system means that payments are not clearing even if the clients are in a position to make them. As of now, payments to and from Russia have not gone through since the imposition of the SWIFT sanction, Shah said.

On Tuesday, Reuters reported that India's largest bank State Bank of India has stopped transactions with Russian entities under sanctions to avoid being in breach of them. BloombergQuint could not independently confirm this.

Nipha Exports has €1,00,000 worth of material to be shipped to Russia and unfulfilled orders worth €3,00,000 up to May this year. With impediments to trade rising, how quickly it will be able to resume shipments and get payments is anybody’s guess.

"For a mid-sized company like ours, things are in the doldrums at the moment."

Shah's pain will be felt by many others.

The ECGC's review of Russia's risk rating will directly affect the exports to Russia, said Arun Garodia, vice chairman at the Engineering Export Promotion Council. Sanctions by the world community might also play a spoilsport for exports from India, since banks may not accept export documents and payments cannot be transferred, he said.

The Indian government, the Reserve Bank of India and major banks are working on alternative mechanisms right now, details of which remain unclear.

While there is a possibility of a bilateral arrangement similar to one made with Iran, allowing companies in both nations to trade in rupees through escrow accounts, it will still be tougher than before. This would permit trade but trade may not be as free as before, Shah said.

While individual businesses will see their trade with Russia disrupted, the economy-wide impact, particularly on trade, may not be as pronounced.

India's trade linkages with Russia and Ukraine are not as large as with other nations. Russia is ranked 32nd for exports from India and 20th for imports. Ukraine ranks lower still.

India’s share of exports to Russia as a proportion of its total exports is 0.8%, while India’s imports from Russia constitutes 1.5% of its total imports, according to data by the Ministry of Commerce and Industry.

The top item of India’s imports from Russia is crude oil, followed by coal and petroleum products. But India’s imports of crude oil from Russia are just 2.3% of its total crude oil imports, said Kaushik Das, chief economist at Deutsche Bank. If we add petroleum products with crude oil, the combined share increases to just 2.5%, with India importing crude oil mostly from other countries, he added.

But there are still pockets of concern.

For instance, coking coal imports are likely to be affected which is a concern for steel-makers, said Garodia. Russia and Ukraine both provide steel semis for export in the global market, he said. There is a likelihood of shortage of semis for producing finished steel globally, Goradia added. Steel semis refer to semi-finished products like ingots, billets, blooms and slabs.

There are also concerns over shipments of sunflower oil. Shipments of more than 3,50,000 tonnes of sunflower oil to India, the world’s biggest buyer, are at risk as Russia’s attack on Ukraine disrupts logistics and loadings at some ports, Bloomberg reported.

On the flip side, India could benefit from higher wheat exports as some of Russia's stock goes off the market.

For businesses, what's most disconcerting is the lack of clarity on how long this conflict will last and what will its repercussions be. Will clients come back? By how much will shipping costs rise and will shipments take longer? Will payment options become easier? And will the credit guarantee cover become available more freely?

One way around the lack of export credit guarantees is to work with 'letters of credit', Prahalathan Iyer, chief general manager at the Export-Import Bank of India said. "While sanctions mean that the ECGC ratings are likely to change, exporters can still do business on letter-of-credit or LC terms without insurance."

Other problem spots may not have easy work-arounds. For instance, the uncertainty around shipments to Russia.

Freight rates to Russia have risen, Shah said. Despite the rise, shipping companies are not keen to book shipments to Russia, he added

It's still too early to be able to say how things will finally shape up, Garodia said. However, if the situation remains adverse, India might require bilateral arrangements with Russia to continue trade, he added.