Russia sanctions: Impact on India and the role of private equity players

The Russian private sector is trying to secure supplies from India and thus, India’s export to Russia, especially in pharmaceuticals, medical devices, consumer goods, construction materials, frozen food, and automobile parts may increase in near future.

The Russia-Ukraine conflict has polarised the world to an extent not seen in recent history, resulting in an unprecedented coupling of global trade and geopolitics. While the choices of the USA, Europe, and China are obvious, the manoeuvring space is becoming narrower by the day for other countries. From a geopolitical point of view, it has led India to an undesirable situation, where it needs the support of the USA & Europe to stand up to China and at the same time, its dependency on Russia for defence equipment remains high along with Russia’s geographical proximity being another crucial factor.  

From an overall trade perspective, trade between India and Russia has not been large, accounting for just 1.2 per cent (approximately) of India’s international trade. India’s primary import from Russia is fossil fuels but in the overall scheme of things, prior to the recent strategic increase, it accounted for only around 2 per cent of India’s overall import of fossil fuels. Similarly, pearls and precious stones are the second-largest imports from Russia but it again accounts for only about 2 per cent of India’s total import. The major export items are pharmaceuticals and electrical machinery but Russia is not a major export destination in any way. Therefore, the sanctions are not likely to pose an insurmountable challenge for India’s private sector and by extension, the private equity investments in India, unless there is a direct confrontation between India and the West, the likelihood of which remains almost zero. Private enterprises are well-placed to find alternate suppliers & buyers and in case of any eventuality, will be able to stop business with Russian counterparts without resulting in major losses or disruption.  

The Russian private sector is trying to secure supplies from India and thus, India’s export to Russia, especially in pharmaceuticals, medical devices, consumer goods, construction materials, frozen food, and automobile parts may increase in near future. These new transactions are being done in rupee-rubble trade and when sanctions become more stringent, the Indian companies involved in these transactions will be at risk of losing their western customers. The private equity industry is quite aware of such risks and assessing this risk is a major part of the due diligence exercise. Since a majority of limited partners are also western institutions, the portfolio companies of private equity firms are most likely to steer clear of such transactions. The investors in the listed markets are also well-advised to analyse the exposure to Russian markets and assess the risk accordingly. However, overall, there shouldn’t be undue stress in the Indian private sector.  

The challenge has been on the government front and it arises from both geopolitical considerations as well as India’s own security conundrums. The vulnerability of the Indian economy to sustained high prices of crude oil has been well known. When all major oil suppliers sell at almost the same prices, India has no incentive to look for additional suppliers. Since the conflict and the sanctions on Russia have significantly increased the crude oil price, India can’t afford to ignore a cheaper alternative. A discount of approximately US$30 per barrel keeps domestic inflation in check and hence, Russia has become the second-largest oil supplier to India recently. Another related development was India allowing Russia to invest in its corporate

Authored by Mohit Ralhan, Managing Partner, TIW Capital Group