EDITORIAL: Indian companies are, as per customs documents and industry sources, using Asian currencies to purchase Russian coal with the objective of at best circumventing US sanctions and at worst reducing the risk of breaching these sanctions on Moscow. India has positioned itself in a win-win situation premised on three factors.
First, its reserves have risen to 608 billion dollars making it the fifth largest reserve holding country in the world — reserves that make the country an extremely attractive market for countries around the world especially during the ongoing global stagflation. Second, the escalation in confrontation between the US and China has been instrumental in India emerging as a strategic partner.
The recent visit of Nancy Pelosi to Taiwan that subsequently led to Chinese military exercises including live fire drills and missile launches encircling Taiwan and cutting off access to civilian ships and aircraft to the island state was denounced by the US and in retaliation a joint military exercise with India has been scheduled in mid-October less than 100 kilometres from India’s disputed border with China in Uttarakhand with a focus on high altitude warfare training.
And finally, India has a long history of relations with the then Soviet Union, including providing oil against Indian rupees and/or purchase of items that the Soviets then dumped on their eastern European allies. In other words, the US and its Western allies are not in a position to enforce their sanctions on India for economic and geopolitical considerations.
In marked contrast, Pakistan is in a lose-lose situation if it decides to procure cheaper fuel from Russia. Not only because of the heavy dependence on external borrowing from West-led multilaterals (including the International Monetary Fund), issuance of Eurobonds/sukuk and programme/project assistance from Western bilaterals.
As matters stand today, there is considerable pressure from the West to open up China Pakistan Economic Corridor (CPEC) to nationals of other countries as well as pressure by multilaterals to renege on power sector contracts signed with Chinese companies under CPEC.
Pakistan’s appallingly low foreign exchange reserves today are awaiting disbursement from the IMF that would in turn release borrowing from other sources, including China, to fund the budgeted expenditure that has inexplicably been raised by a trillion rupees in the current year. In short, with more than 50 percent borrowed foreign reserves envisaged in the near future, Pakistan is in no position to defy sanctions.
And to make matters worse, Pakistan since 2018 has been on the Financial Action Task Force’s (FATF’s) grey list defined as a country that does not take full measures to combat money laundering and terrorism financing but did raise hopes during its June plenary that a visit by the FATF in October this year may lead to a formal announcement of Pakistan’s removal from the list.
Being on the grey list may scare away prospective investors and creditors and research suggests that this placement may have cost Pakistan more than 30 billion dollars. While FATF consists of 37 countries, including China, yet it is unlikely that the US and Europe may decide to remove Pakistan from the list in the event that it violates US sanctions on Moscow. In addition, Pakistan’s exports are mainly to the US and Europe, a region which is the second largest source of remittance inflows after the Middle East, and any sanctions on Pakistan would cripple the economy.
The narrative that Pakistan can and should purchase cheaper fuel from Russia is therefore not a viable option today. One can only hope that the government can create fiscal space as well as successfully divert its existing heavy dependence on the West in terms of borrowings/exports/imports/remittances before it may become feasible to take advantage of cheaper prices of commodities in countries under sanctions.
Copyright Business Recorder, 2022