Sanctions against Russia: Risks for India

One of the goals of large-scale sanctions against Russia after the start of the special military operation (SMO) was the isolation of the Russian economy in terms of trade and financing. The task was partly accomplished: the sanctions significantly undermined domestic trade with Western countries. The export of dual-use goods, hundreds of industrial items and various "luxury goods" to Russia is prohibited. Key components of Western imports from Russia were also subject to restrictions: oil and oil products, coal, precious and non-ferrous metals, diamonds, etc. Financial sanctions have largely eliminated the possibility of transactions in US dollars, euros and the other currencies of the initiating countries. Transport restrictions have complicated logistics, and price caps on oil and oil products have indirectly increased the costs of suppliers.

The bottom line is that we will see a trend of increasing pressure from the US on India and Indian companies to increase barriers and costs for trade with Russia. But the critical mass of such pressure is not enough to stop bilateral trade and its possible future growth. A complete blockade of a large economy like Russia is simply impossible.

One of the goals of large-scale sanctions against Russia after the start of the special military operation (SMO) was the isolation of the Russian economy in terms of trade and financing. The task was partly accomplished: the sanctions significantly undermined domestic trade with Western countries. The export of dual-use goods, hundreds of industrial items and various "luxury goods" to Russia is prohibited. Key components of Western imports from Russia were also subject to restrictions: oil and oil products, coal, precious and non-ferrous metals, diamonds, etc. Financial sanctions have largely eliminated the possibility of transactions in US dollars, euros and the other currencies of the initiating countries. Transport restrictions have complicated logistics, and price caps on oil and oil products have indirectly increased the costs of suppliers.

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However, Russia is vigorously breaking through isolation thanks to relations with friendly countries. India plays a significant role among them. Over the past two years, trade between the two countries has increased several times, including by reorienting supplies of Russian raw materials to the Indian market. At the same time, Indian business is concerned about the risks of secondary sanctions from the United States and other Western jurisdictions. How justified are such concerns, what is the risk structure for Indian business, and how exactly does the risk manifest itself in practice?

Let's start with a general assessment. The risks facing Indian business with regards to Russia remain relatively low due to New Delhi's skilful diplomacy, the specifics of Russian-Indian trade, and the caution taken by Indian businesses in dealing with sanctions risk. However, the risks continue to grow due to the increased activity of the United States in applying secondary sanctions. In 2023-2024, new legal mechanisms for secondary sanctions appeared, and in the second half of 2024, the number of Indian companies subject to such restrictions on the grounds of working with Russia increased significantly. Here, details and nuances are important depending on the area of bilateral trade.

In the sphere of military-technical cooperation, risks emerged even before the SMO—in 2017. Art. 231 of the US federal law "Countering America's Adversaries Through Sanctions Act" (CAATSA) created a mechanism for imposing secondary sanctions on buyers of Russian weapons. In practice, such sanctions were applied to China and Turkey, although they could hardly be called significant. In both cases, blocking financial sanctions were imposed on individual officials and departments of government agencies involved in the purchase of Russian systems. Such sanctions were not used against India, the largest customer of Russian weapons. Here, the Indian government's firm line came into play, which boiled down to the fact that in any matter of India's security, Delhi would ignore the risks associated with sanctions. An even greater role was played by Washington's reluctance to spoil relations with Delhi against the backdrop of growing rivalry with China. In the future, the risk may still play a destructive role. American arms suppliers are increasingly working with India and may use sanctions to their competitive advantage in the future. However, Russia will remain a major arms supplier to India for decades to come, including due to the mass testing of Russian systems in a major armed conflict.

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In the area of financial transactions, the risks increased significantly in December 2023 with the publication of J. Biden's Executive Order No. 14114. The order authorized the US Treasury to impose blocking financial sanctions or prohibit the maintenance of correspondent accounts in US banks in relation to foreign financial institutions servicing transactions with the Russian military-industrial complex and certain dual-use goods. In June 2024, the US Treasury explained that transactions with Russian banks under US sanctions could also serve as grounds for this due to their affiliation with the Russian "military economy."

Washington has hardly used this rule, including against Indian banks, but it has great psychological significance. Banks in friendly countries have become very cautious about financial transactions with Russia. In the foreseeable future, the US Treasury Department may well block several banks in countries friendly to Russia to demonstrate that the rule works. The problem is partly mitigated by settlements in national currencies. However, they also fall under Executive Order 14114, which does not remove the concerns of financial institutions. One way to solve the problem is to create an ecosystem of banks specially focused servicing transactions with Russia which are ready to be included in the US lists of blocked entities. The development of such ecosystems is an almost inevitable response to sanctions. A long-term way to reduce risk is to develop financial settlement mechanisms independent of Western operators. However, this task has not yet been fully resolved.

In the field of energy and food cooperation, the situation is somewhat more favourable. Financial settlements for energy transactions to a certain extent fall under the exceptions to the US sanctions regime. The oil price cap creates problems for oil carriers and suppliers. For the former, there are risks of secondary sanctions, as well as criminal and administrative prosecution in the jurisdictions of the countries initiating the sanctions. For the latter, there are problems of pressure on the price of oil and oil product supplies. However, the price cap does not fundamentally hinder the supply of energy resources to the Indian market. The same applies to food transactions. They are also currently subject to some exceptions from the sanctions regime. But it should be taken into account that the exceptions can be cancelled at any time, that is, the task of developing independent systems of financial settlements, insurance, logistics chains, etc. remains more than relevant.

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Finally, risks are growing for Indian intermediaries and suppliers involved in the export and re-export to Russia of industrial goods and dual-use goods, including those with Western components. In the second half of 2024, the number of Indian companies subject to such sanctions increased sharply. In particular, the following companies were subject to blocking sanctions: Innovio Ventures, Pointer Electronics, RRG Engineering, Shreya Life Sciences, Abhar Technologies and Services, Denvas Services, and Emsystech for alleged supplies of electronics to Russia. KDG Engineering and Shaurya Aeronautics were targeted for supplies of electrical equipment and other goods to Russia. Khushbu, Lokesh Machines Limited, Sharpline Automation, Shreegee Impex, Galaxy Bearings and Orbit Fintrade were targeted for supplies of machinery. These companies, apparently, are small organisations that do not play a systemically important role in Russian-Indian trade. Most likely, new ones will emerge in their place. In addition, even such companies operate in smaller volumes compared to other friendly countries. Thus, according to the Russian International Affairs Council (RIAC), since the beginning of the SMO, 207 companies from China (including Hong Kong), 104 companies from Turkey and 101 companies from the UAE have been subject to secondary US financial sanctions. But India has already overtaken Switzerland and Singapore. They account for 25 and 22 companies, respectively, while India has 25.

Indian companies are also cautious in transactions directly or indirectly related to American jurisdiction. This is evident from the low share of Indian companies that are subject to administrative and criminal investigations by the US authorities in connection with the intentional or unintentional circumvention of sanctions. Indian companies are rarely subject to such criminal investigations; among the administrative investigations of the US Treasury Department over the past 15 years, the only exception is Godfrey Philips—an Indian tobacco supplier that exported its products to the DPRK through third countries. Some of the transactions were conducted in US dollars, which gave the US Treasury grounds to hold the Indian company liable. There have been no other similar cases so far. Such investigations much more often involve US companies themselves or subsidiaries of US persons, as well as companies from the UK and EU.

The bottom line is that we will see a trend of increasing pressure from the US on India and Indian companies to increase barriers and costs for trade with Russia. But the critical mass of such pressure is not enough to stop bilateral trade and its possible future growth. A complete blockade of a large economy like Russia is simply impossible.

First published in the Valdai Discussion Club.