India and the Customs Union: Towards greater economic integration

What promised to be a routine and dull visit to India by the Chairman of the Board of the Eurasian Economic Commission, Viktor Khristenko, unexpectedly received broad coverage in the Russian media even before it began. Shortly before the visit, the Head of the Eurasian Department of India’s External Affairs Ministry Ajay Bisaria said New Delhi intended to talk to Moscow about the possibility of signing a CECA with the Customs Union. These remarks led to a flurry of media activity, which was similar to the reaction when Vietnam announced such intentions a year ago.

It is clear however that New Delhi and Moscow, as well as Almaty and Minsk, are above all seeking to expand trade. While they have a good diplomatic relationship, economic ties between Russia and India are dwarfed by their rapid development of trade with China. Russian-Indian trade turnover barely reached $11 billion in 2012, while Russia traded $90 billion with China and is already planning to achieve the $200 billion mark over the next few years. The plans of Russia and India are more modest at the moment, aiming for a $20 billion turnover by 2015. This despite the fact that Russian-Indian trade posted a record 32 percent growth in the first 11 months of 2012!

It took Russia, Kazakhstan, and Belarus eleven long years to establish the Customs Union, but even now disagreements crop up from time to time. The members have been trying to engage neighbouring Ukraine into joining the union, yet officially Kyiv is in no hurry to join. But the doors are not closed to other potential members.

India’s background is favourable and positive due to the fact that it has established special economic and political ties with each of the Customs Union members, and also because the positions of all four states in the international arena are very close. The economy is the weakest link in this strategic partnership. India isn’t even in the top ten of Russia’s largest trade partners (the European Union ranks first, followed by China).

Prior to the establishment of the Customs Union, Russia was engaged in free trade negotiations with its top trade partners, receiving around 30 applications. Once the Customs Union was created though, all negotiations have had to move automatically to a new basis, because Russia has essentially ceased to be a sole player.

According to a source with the Russian delegation that was in Delhi last week, Russia is a bit more guarded about an agreement than India. Mutual interest certainly exists, but the two sides need to be clear about which sectors of industry would benefit from such a partnership. No detailed studies have been done so far.

“India is a classic net importer, with its imports consistently exceeding its exports. At the same time, India’s key exports heavily overlap with those of the Customs Union,” Investcafe analyst Ilya Rachenkov said. The overlapping takes place in metals, mining and oil refining. Given that Russia, Kazakhstan, and Belarus have their own competitive manufacturing industries, a free trade agreement is unlikely to be seen as a big threat. “India is perhaps more interested in avoiding export duties on potential supplies of oil and natural gas from Russia: Fuel and energy account for 35 percent of Indian imports,” Rachenkov said.

He believes that closer ties between India and the Customs Union members should have a positive effect on the Russian machine building industry, whose products are in great demand in India. If a free trade agreement is signed or (hypothetically) India joins the Customs Union, Russian goods would be exempt of duties in India, thus receiving an obvious competitive advantage.

All is not as clear-cut in the area of metals though. The industry, including precious metals producers, could suffer because of competition from Indian peers. The metallurgy lobby is quite strong in Russia. It was largely thanks to this lobby’s persistence that Russia didn’t back off from efforts to join the World Trade Organization for as long as 17 years. They were more interested in WTO membership than anyone else, since they can put an end to anti-dumping probes launched against them.

“We are here on two missions: On the one hand, to ensure the transparency of our interaction taking into account the realities of today’s economic integration among the Customs Union member countries, and on the other hand, to pave the way for a mechanism that would help India achieve new results in its cooperation with the Customs Union member countries,” Khristenko told journalists in New Delhi. He added that both countries are moving in the direction of setting up a forum to discuss what type of document, perhaps including a CECA, could give a new impetus to the development of India’s relations with its partners that are already members of the Customs Union. These negotiations should take place again in June.

Russia is expecting specific proposals from India, a source with the Russian delegation said. Which industries would work absolutely unencumbered and which would require a transition period so that this way of broadening cooperation doesn’t result in a crisis at Russian, Kazakh, or Belarusian companies – these questions need to be answered for them to be able to decide if a free trade agreement is worth it. 

Russia is keen for a free trade agreement to cover not just goods, whose prices often depend on market fluctuations, but also services and mutual investments. This format has been applied to Vietnam, for instance. The Russian source said that the Customs Union had left almost no “forks on the road” in the negotiations for a free trade agreement with Hanoi, adding that the preliminary stages of an agreement have been cleared. A formal decision is still a couple of years of negotiations and approvals away, the source added.

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