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Business News/ Opinion / Views/  The turning tides of US sanctions: India caught between a rock and a hard place
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The turning tides of US sanctions: India caught between a rock and a hard place

India’s economic priorities lie in maintaining its relationships with both the US and Russia while adopting countermeasures to meet its own trade obligations

The US has imposed sanctions on Russia as punitive measures following its invasion of Ukraine. (AFP)Premium
The US has imposed sanctions on Russia as punitive measures following its invasion of Ukraine. (AFP)

The recent escalation of US sanctions against Russia seems to have significant consequences for the Indian market. India has strong economic relationships with both the countries. At the moment, however, India seems to be caught between a rock and a hard place in balancing financial interests and international obligations.

Sanctions, issued independently or collectively by an international organisation such as the United Nations, are used as mechanisms to deter countries from engaging in actions against international standards. 

The US has used its dominant position in the international community to use this tool to disincentivise countries from engaging in such actions.

Primary sanctions are typically sector-specific and restrict certain actions of entities of the sanctioning country from interacting with the target country. Secondary sanctions operate indirectly to deter third-party countries from transacting with the target.

Hence, third-party countries have been allowed to develop countermeasures to check against the detrimental effects of such limitations.

In the context of the US' secondary sanctions targeting Russia, India too can resort to such countermeasures to provide an avenue of insulation for its fiscal priorities and market interests.

Forms of countermeasures

  1. Bilateral negotiations and conditional waivers

The US government can authorize a waiver against sanctions to allow third-party countries and targeted countries to transact if found to be in America’s national interest. 

These waivers are conditional, for a limited period, and leave the future of such collaborations up to the discretion of the US. Conditional waivers are developed through bilateral negotiations between the affected country and the US.

India, during the US sanctions imposed on Iran in 2012, was given a waiver that allowed it to continue its investments in Iran’s petroleum and gas industry.

With regards to the sanctions against Russia, India is yet to receive such a waiver. The non-granting of this waiver will have a detrimental impact on India’s defense position.

2. Decreasing dependency on the US dollar

US sanctions currently bar the country’s financial system and persons from participating in any transaction with Russia. International trade transactions become challenging as they are typically executed in US dollars or through American financial institutions.

India has employed alternative currency mechanisms to avoid violating these sanctions. Alternative currencies such as the ruble, euro or dirhams have been used to execute agreements with countries targeted for sanctions and continue lucrative financial relationships.

India and Iran, for instance, have developed a ‘rupee-rial’ mechanism to allow India to continue payments for Iran’s crude oil supply. Reportedly, this may evolve into a more concrete relationship with Iran, which has made tentative plans to set up national bank branches in India to facilitate this trade.

International alliances have promoted the scaling back of dependency on the US dollar and promoting the use of the local currency.

3. Countermeasures for companies

Secondary sanctions pose a unique challenge for multi-national corporations. A company could find itself caught in a web of conflicting directives based on the location of its incorporation and various subsidiaries–a question of jurisdiction the courts must contend with to determine the liability of sanction requirements.

The recent incorporation of a subsidiary into a Gujarat-based financial centre allowed it to retain its Russian oil assets. The corporate structuring of these entities allows management of assets overseas due to its status as a foreign jurisdiction for taxation purposes and, therefore, does not attract the application of India’s sanction compliance requirements.

The future

India’s economic priorities lie in maintaining its relationships with Russia and the US while adopting various countermeasures to meet trade obligations while respecting its sanction compliance liabilities. 

The nation has painted an optimistic future of navigating these complexities through extensive negotiation with its global partners.

Faraz Sagar and Sara Sundram are partners at Cyril Amarchand Mangaldas

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Published: 19 Dec 2023, 12:05 PM IST
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