Turn to East: India and Russia draw closer in the Far East and the Arctic

India and Russia can work with countries like Japan and Korea to promote joint investments for exploration in the Far East, the Arctic and Siberia.

Turn to East: India and Russia draw closer in the Far East and the Arctic
Thus, alternative energy sources and communication routes have become a strategic imperative for India.

By Satyajit Mohanty & Rajan Kumar

The development of the far-flung regions of Siberia, the Arctic and the Far East has become a strategic priority of Russia. It furthers Russia’s broader plan to establish itself as an important Asia-Pacific player, and diversify and forge partnerships with key regional players. Poor infrastructure and sparse population in these areas, however, sit in high contrast to the developed and densely populated borders of China- the consequences of which can be destabilising for Russia. These regions are home to one of the largest reserves of hydrocarbon, metallurgical coke, rare-earth and precious metals in the world. Russia wants to develop these regions by wooing investors and forging regional value chains, integrating them with the developed economies of China, Japan, Korea and now India. Reduced tax rates on the extraction of minerals and grant of rights to acquire land to exploit them for commercial purposes under the Homestead Act are some of the measures that the Putin administration has undertaken to promote balanced regional development.

At present, China is the leading investor in the region. Chinese investments account for nearly two-thirds of the total Foreign Direct Investment of $33 billion that has come to Russia’s Far East (RFE) in the last four years. Recently, Sherwood Energy, a Chinese company based in Hong Kong has signed a deal worth $11 billion to develop a new gas project in the Khabarovsk region. China and Russia are working together on more than 50 projects. Chinese projects, nonetheless, come with tight preconditions, including the need to employ Chinese labour. According to some estimates, more than a million illegal Chinese immigrants are living in Russia. This has created ethnic anxiety and xenophobic tensions in the RFE. Such sentiments gain credence when they are woven to the narrative of Sino-Soviet confrontations of the 1960s. At times, these concerns are exaggerated but they nonetheless impact the subconscious minds of Russian policy-makers.

Thus, with the twin objectives of development and diversification, Russia is actively engaging with other regional players. It began it’s annual Eastern Economic Forum in 2015 to invite political and business leaders from neighbouring countries. Japan, South Korea, ASEAN members and India are the key states which have the potential to invest and counter-balance the growing Chinese influence in the region. Russia’s turn to Asia fits in perfectly well with India’s Act East policy which was extended further to “Act Far East Policy” by Prime Minister Narendra Modi during his visit to Vladivostok recently.

India’s economic interests are complementary to Russian requirements in the region. Russia needs labour resources, capital, technology and market. India needs energy, mineral resources and farming land. To achieve the goal of a 5-trillion economy over the next few years, India’s energy and mineral resource requirements are set to increase manifold. Metallurgical coal and gas are glaring cases in point. Under its National Steel Policy, India has set an ambitious target of producing 300 million metric tons of steel by 2030- a three-fold increase from its current production levels. Imports of metallurgical coal, a major input for the iron and steel industry, are on the rise and India is set to become the largest importer of coal in the world by 2025. The story is similar on the hydro-carbon front.

India’s concerns lie in reducing the volatilities and resultant vulnerabilities associated with imports of around eighty per cent of its crude requirements from the unstable Gulf region. Experts predict that the drawdown of US presence alongside internecine conflicts in the Gulf will make the region more conflict-prone. India had to pay a heavy price due to its search for alternative sources following US sanctions on Iran. Thus, alternative energy sources and communication routes have become a strategic imperative for India.

India also wants to move towards a gas-based economy. The share of gas in India’s energy basket at 6 per cent is a paltry one-fourth of the world average. India’s transition to a gas-based economy necessitates at least a four-fold ramp-up of the share of gas in its energy basket by 2030. Until recently, India was largely dependent on Qatar for gas imports. As part of its diversification strategy, the first shipments of LNG from both Russia and the US were received in 2018.

India’s hunger for energy sources, especially coking coal and hydrocarbons, entails the quest for overseas investments and asset acquisitions as a logical corollary. Russia can be a reliable and steady partner to meet these requirements. The strategies of India and Russia- both internal and external naturally draws one to the other’s energy sector orbit. Warm Indo-Russian relations and mutual interdependence have catapulted energy cooperation as one of the cornerstones of Indo-Russia relations- as underlined in the agreements signed during Modi’s visit to Vladivostok.

In this Summit, the focus was on trade and investment. Agreements on investments in the energy sector in the Far East and the Arctic accounted for the bulk of the fifteen MoUs and thirty-five commercial documents signed during this visit. Currently, the imports of LNG from Russia compared to imports from other countries is minuscule. Indian players in the private sector have already begun to import coal from Russia, and now the public sector behemoths like SAIL entered into agreements to source coking coal for steel production. India has already made forays into the hydrocarbon industry. Indian public sector oil and gas consortiums involving companies like ONGC and IOCL have invested in Russian energy firms which have undertaken projects at Sakhalin, Vankor and Tas-Yuryakh.

In the absence of direct land-route, transportation becomes a real challenge for trade between India and Russia. The International North-South Transport Corridor (INSTC) will take years to become fully functional. In the last meeting, both countries have agreed to develop the Vladivostok-Chennai sea route, which will cut down the journey time of large ships from about 40 to 24 days. Russia is becoming India’s one of the most important oil and gas investment destination. Russian oil company Rosneft purchased Essar Oil for $12.9 billion. India has offered Russian firms like Novatek with opportunities to invest in its City Gas Distribution (CGD) and LNG projects and participate in the various exploration and production and refining activities. Novatek also wants to sell LNG to India from its Arctic LNG-2 project.

A significant outcome of the Modi’s visit is the $1 billion Line of Credit (LoC) for exploration in the resource-rich Far Eastern region – the first-ever region-specific LoC extended by India. This will encourage Indian investors and assuage their commercial concerns in the Far East. China extended $3 billion LoC in the area of infrastructure and technology in 2017. This LoCs will be linked to local sourcing financial norms. A big breakthrough in terms of movement of Indian labour- both skilled and semi-skilled is also on the cards. India has been a strong advocate of movement of people, and sectors like shipbuilding, mineral exploration, dairy and farming can attract a good number of Indian workers in the thinly populated regions of Siberia and the Far East.

India and Russia can work with countries like Japan and Korea to promote joint investments for exploration in the Far East, the Arctic and Siberia. The ports of North-East Asia and South East Asia can act as transit points for movement and off-loading LNG en-route India. However, a lot of spadework needs to be done by both countries. India and Russia need to codify and align investment protection regimes, transfer pricing mechanisms, domestic tax preferences, expedited green corridor customs clearances and data sharing mechanisms. Russia needs to liberalise its services and visa facilitation regimes further to facilitate the hassle-free movement of Indians. The visa-regulations are much easier for Chinese than it is for Indians. India has slashed Customs duties on LNG imports, but issues pertaining to the valuation of gas, dedicated berthing facilities at ports, especially along the eastern coastline, eventually need to be addressed.

The Far East and the Arctic have geopolitical, economic and strategic significance for India. The development of the North Sea Route along the Arctic coast can provide an alternative to the existing Suez Canal route. India should not be left behind and must have robust economic and strategic footprints in these regions.

(Mr Mohanty is in the Indian Revenue Service and Mr Kumar teaches in School of International Studies, Jawaharlal Nehru University. Views expressed are personal.)

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First published on: 11-09-2019 at 17:30 IST