Trade ties with China under Ukraine conflict shadow

Russia’s most reliable partner, China, has been targeted indirectly, with the G7 countries taking measures to isolate the world’s second-largest economy.
Image used for representative purposes only.
Image used for representative purposes only.

Unprecedented political uncertainties following Russia’s invasion of Ukraine, and the revival of the new Cold War sentiments, have significantly triggered a realignment of the major economies. Within days of the beginning of the conflict, the Western alliance imposed a slew of sanctions on Russia, the major component of which was the ban imposed on key Russian banks by the SWIFT system, the world’s dominant financial messaging system. The ban prevents these banks, representing over 80 per cent of total Russian banking sector assets, from conducting their financial transactions worldwide quickly and efficiently. The sanctions dealt a body blow to Russia’s ability to conduct trade transactions with its partners.

Russia’s most reliable partner, China, has been targeted indirectly, with the G7 countries taking measures to isolate the world’s second-largest economy. In 2022, President Biden revived Barrack Obama’s idea of pivoting to Asia, explicitly intending to develop an alternative to the global production networks that lean heavily on China’s industrial might. A 14-member trade grouping, the Indo-Pacific Economic Framework (IPEF) that includes India, is being negotiated to institutionalise the IPEF.

How are India’s trade relations shaping up in this geopolitical turmoil? The Western alliance’s economic sanctions aimed at isolating Russia have put India in a piquant position vis-à-vis its long-time ally. Though Russia was not among India’s largest trade partners, India has been dependent on Russian fertilisers. However, India was the largest importer of Russian arms since the turn of the millennium, which, according to the Stockholm International Peace Research Institute (SIPRI), was valued at over $38 billion. As against this, India’s imports from the US were less than $5 billion. Notwithstanding this relatively less dependence on the US for arms, India is an integral part of the Quadrilateral Security Dialogue (QSD), or the Quad, which is a strategic security dialogue that, besides the US, also includes Australia, India, and Japan.

India’s trade ties with China have been growing at a robust pace for at least two decades, almost entirely due to its dependence on the factory of the world. This dependence has shown no signs of abating despite the worsening political relations between the two countries. China was India’s largest trade partner for many years, though data from the Department of Commerce suggests that in the post-Covid phase, the US has replaced China. But India remains dependent on its northern neighbour, especially for vital electronic products and intermediates.

Post the Ukraine conflict, the Western alliance would have expected their strongest ally in South Asia to support the efforts to isolate Russia economically. However, India’s response was diametrically opposite as its imports from Russia increased from less the $10 billion in 2021-22 to $46.2 billion in the previous financial year. As a result, Russia emerged as India’s 4th largest import source in 2022-23, up from 20th in 2021-22. The rise in Russia’s importance as India’s import source came on the back of a nearly 13-fold increase in crude oil imports, reaching over $31 billion in 2022-23 from $2.5 billion a year before. Imports of other major commodities of India’s interest, namely fertilisers and coal, increased 4-fold and 3-fold, respectively.

India’s imports from Russia provided a win-win situation for both countries. Reeling under the sanctions slapped by the Western allies, Russia, the third largest producer of crude oil, lost a large share of its export market, especially in Europe, which accounted for nearly one-half of its exports at the beginning of 2022. This was when India stepped up its crude oil imports from Russia, taking advantage of the hefty discount of $15-20 per barrel, though, in recent weeks, the discount has fallen to as low as $5. The discounted oil imports could not have come at a better time for India, as it helped the government find a way out of the high inflation levels. Due to this increase in Ural oil imports, Russia became India’s second-largest source of oil in 2022-23, squeezing out Saudi Arabia. But as the financial year ended, Russia became India’s largest source, with a share of 29% in March 2023.

In the context of the sanctions on Russia, perhaps the most significant development was the increase in India’s exports of petroleum products to the Netherlands by almost 2.5 times. Rotterdam port in the Netherlands is the most convenient location for the supply and transit of crude oil in Europe, fed by imports from India, thus helping the EU members to partially obviate the supply shortages arising from the sanctions imposed on Russia.

During the past few years, the government of India began planning to reduce its dependence on China by beefing up the country’s manufacturing facilities using the production-linked incentive (PLI) scheme. Despite these efforts, India’s imports from China have increased in the previous financial year, albeit much slower, to reach $98.5 billion. However, with exports from India declining by 28% from the record level of $21.3 billion in 2021-22, the trade deficit vis-à-vis China had escalated to over $83 billion. The deficit with China was almost a third of the overall trade deficit during the previous financial year.

Even with these not-so-comfortable numbers of its trade with China, India has at least two positive takeaways. The first is that although imports of mobile phones from China are still increasing, they are doing so considerably slower. Further, imports of several pharmaceutical intermediates have declined. However, whether these trends are real can be assessed only after a year or two since the decline in imports from China could have resulted from the squeeze on the country’s manufacturing sector in 2022 following the strict Covid-related restrictions.

Biswajit Dhar

Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU

Related Stories

No stories found.

The New Indian Express