Russia-Ukraine crisis: What afterclap will the war have on MSME exporters?
According to experts, the current military crisis between Russia and Ukraine is expected to have an impact on Indian exporters transporting goods to the region. MSMEs account for the majority of India’s exports to Ukraine and Russia, and as a result, the current crisis may pose a number of issues for MSME exporters, including delays in deliveries, delayed payments, damage to shipments, and so on. According to official data, India’s bilateral trade with Russia and Ukraine was $11.9 billion and $3.1 billion in 2021. During the April-December period of FY2022, Russia was India’s 25th largest trading partner, with $2.5 billion in exports and $6.9 billion in imports.
“Among the businesses impacted by this crisis will be MSMEs, as goods exported to these two countries, which include pharmaceuticals, machinery, and apparel, are largely produced by MSMEs,” Ajay Sahai, Director General and CEO, Federation of Indian Export Organisations (FIEO), told Financial Express Online.
Pharmaceuticals, chemical products, automotive parts, and technology are among India’s main exports to Russia. Apart from supplying crude oil, fertilisers, precious stones and metals, Russia is India’s largest arms supplier in terms of imports. India’s bilateral trade with Ukraine, on the other hand, is expected to be $3.1 billion in 2021. While exports of pharma, agrochemicals, food products, and other items totaled $510 million last year, imports totaled $2.6 billion, with sunflower oil accounting for around 70% of the total.
“India exports a lot of medicines to Russia and Ukraine. If this turns out to be a long-lasting war, there would be an impact on exports from India even as it might also lead to a scarcity of drugs in these two countries. Indian pharma exporters ship consignments every quarter and, hence, if this crisis continues beyond March as well, exports would be hampered,” J Jayaseelan, Vice President, Indian Pharmaceutical Association and Managing Director, Sai Mirra Innopharm told Financial Express Online.
He said that pharma exports to these countries accounted for about 12% of India’s total global pharma exports.
In FY21, MSMEs accounted for 49.5 percent of India’s global exports. Importantly, this figure was derived from an older definition that limited investment in plants and machinery to Rs 5 crore in order for a company to be classified as an MSME. The definition was amended in June 2020, increasing the maximum limit to Rs 50 crore in plant and machinery investment and the turnover limit to Rs 250 crore. According to experts, the new classification of MSMEs is likely to increase the percentage of MSMEs in India’s exports to as high as 80%.
“My assumption is that over 80 percent of exports are now coming from MSMEs since many more businesses are now under the MSME net along with wholesalers and retailers. Moreover, most of the trade to and from Ukraine and Russia has been from MSMEs. The current crisis will lead to delays in the delivery of goods as shipping companies may pause deliveries or if alternate routes have to be taken to reach the destination,” Rajendra Prasad Sharma, Professor, Indian Institute of Foreign Trade, told Financial Express Online.
Coking coal imports from Russia are another topic of contention for Indian industries in terms of imports. Coking coal, which is essentially a fuel, is mostly used in blast furnaces to produce steel. In the midst of the current turbulence, its price may rise from roughly $300-400 per metric tonne, affecting steel production costs. According to energy and commodity price benchmarks supplier Argus Media, India’s coking coal imports totaled 141,577 tonnes in November 2021, down 65 percent from the previous year.
“Market also won’t be able to absorb the prices immediately if we increase them. The higher cost will reduce the buying power of customers. It would also lower production and have an impact on employment generation. Our business is still operating at 30-40 per cent lower production from pre-Covid level and Ukraine-Russia crisis might further drag it down,” Babu told Financial Express Online.
The trade impact is also considered in light of the world’s extraordinary sanctions against Russia for its invasion of Ukraine. The leaders of the European Union, Canada, France, Germany, Italy, the United Kingdom, and the United States signed a joint declaration on Saturday committing to “ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and will harm their ability to operate globally.”
Restrictive restrictions were imposed, among other things, to prevent the Russian Central Bank from using its international reserves in ways that would undermine the sanctions’ effectiveness. SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a global network of over 11,000 banks and financial institutions from over 200 countries that facilitates cross-border money transfers.
“Sanctions will create more uncertainties for MSMEs exporting to Ukraine and Russia amid a lack of secure trade and a lack of export guarantees. Diplomacy and trade will have to go hand-in-hand. However, sanctions are like a weapon that will impact trade,” added Sharma.
Experts also warned that changes to the government’s export lending institution, the Export Credit Guarantee Corporation (ECGC) credit,’s underwriting criteria for shipments to Russia, could pose further hurdles for MSMEs. Last Monday, the ECGC downgraded Russia to restricted cover from open cover, which allows policyholders to get coverage on a more liberalised basis. If exporters desire credit guarantee insurance to Russia, they’ll have to get specific authorization from the ECGC on a case-by-case basis under the Restricted cover category. According to the ECGC, the move is necessary to ensure that payments for commodities shipped to India remain secure during the current situation.
“If there is a development in some country that might have an impact on payments, then we, as an insurer, should be conscious of the risk involved. We have the right to assess the cover that we have given,” M Senthilnathan, Chairman and Managing Director, ECGC, told Financial Express Online.
The ECGC’s action was prompted by the proposed exclusion of significant Russian institutions from the SWIFT network. Banks would be unable to handle transactions in such a circumstance. Payments to MSME exporters will be halted as a result of this. According to Senthilnathan, it will be impossible to continue exporting and receiving payments as long as a bank not connected to the SWIFT network is engaged in the transaction. According to the ECGC, exporters must locate other banks that will continue to participate in the SWIFT network in Russia and are acceptable to the buyer.
“Last year, out of around Rs 20,000 crores of exports to Russia, only around Rs 750 crores of exports were under credit guarantee cover. We believe the same exporters will continue exporting to Russia with the cover. Hence, we need to alert them that due to the possibility of deterioration of risk and for effective utilisation of the cover, they need to take our specific approval. In case the bank is removed from the SWIFT network, there would be a significant delay in payments,” added Senthilnathan as he suggested exporters consult general insurers to ensure a safe voyage of goods.
However, in response to the ECGC’s decision, Sahai stated that the US Office of Foreign Assets Control (OFAC) has excluded agricultural, pharmaceutical, and energy exports to Russia, and that MSMEs in these sectors should be given financial support for items exported. He also stated that MSMEs should be given ample time to adapt to the new rules.
“ECGC mandated bill of lading cut off date till February 25. There should be some lead time as umpteen consignments have been cleared by customs or are at the port. Do you expect exporters to take back shipments after getting them customs cleared?” said Sahai.
A bill of lading is a legal document that a shipper receives from a carrier acknowledging receipt of cargo for shipping.
Experts worry that the war might have a catastrophic effect on trade because India is one of Russia’s and the US’s most powerful friends. With a value of $112.3 billion, the United States was India’s leading merchandise trade partner in 2021. India, along with the United Arab Emirates and China, has voted against the UN Security Council’s resolution condemning Russia’s aggression against Ukraine. Eleven UNSC members backed the resolution, but Russia vetoed it.
“This crisis is not just about India’s bilateral trade with Russia and the US. A lot more issues might unfold ahead involving India’s equation with the two countries. One cannot look at this issue in isolation. If you are found taking a particular stand, then it might irk the other side. India will have to diplomatically handle the situation,” said Sharma.