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BW Businessworld

Moscow Is Angry

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It is the R in BRICS. While most of us focus on the C of China, it is the R or Russia that helped India develop a strong economic foundation decades ago. It was this foundation on which reforms were launched in the 1990s.

India’s relations with USSR and later Russia have been fairly consistent. While the pace of growth was low, the quality of trade and investment has been high.

The bilateral trade between Russia and India is expected to cross $20 billion by 2015. Last year, it was $6.5 billion.

Investment by private and state owned companies in each country has increased. The governments are encouraging joint manufacturing with the private sector.

Now this decades old relationship is facing some turbulence as Russian investments in India are souring.

Such is the sense of negativity that President Vladimir Putin has postponed his visit to India by a month to December 2012.

Though not acknowledged explicitly, Russia is upset with India as two of its key investments are facing trouble. The Kudankulam power plant set up with Russian support still faces civil opposition. While this is being sorted out, Russians are more upset about its telecom company Sistema.

Sistema has invested more than $3 billion in India as a telecom operator that operates under the MTS brand.
It was the only operator that got a license for CDMA operations in 2007 and since then had been increasing its services and investment in India.

But the company was sucked into the 2G scam. When the Supreme Court cancelled the licenses of all operators that were deemed to have received licenses in questionable circumstances, Sistema was included.

Sistema thought this was unfair since it had not participated in the GSM spectrum allocation at all. The scam was in GSM, not CDMA allocation. Moreover, the audit by the CAG did not mention Sistema or the allocation of CDMA spectrum. Sistema was the only bidder and got a pan-India license.

The Russian company feels that it lost its license for no fault of its own. Since then the company has been fighting a legal battle in the Supreme Court. All that the company seeks is that its case should be treated separately from the GSM operators.

After its review petition against the cancellation of license was dismissed by the Supreme Court early this year, it filed a curative petition in May seeking a review of the dismissal. The Supreme Court evolved the curative petition mechanism to ensure that petitioners have an option of relief against a final judgement by the court.

Sistema did not participate in the fresh auction for GSM and CDMA spectrum since it is expecting the Supreme Court to hear its curative petition. While the GSM auction saw a tepid response, the CDMA auction did not get a single bidder.

While the company is eagerly engaging in the legal process to get its license restored, the Russian government is deeply disappointed with the attitude of the Indian government. Russia feels that Indian government has not forcefully argued the case for Sistema in the Supreme Court. Sistema is a Russian state owned company and wants India to respect and protect what it sees as a sovereign investment.

The government of India has not supported Sistema’s curative petition as well. President Putin and his government see the ill-treatment of Sistema as an insult to the relationship between the two countries. For India, this could be tricky. While the government is grappling with the legal wrangle caused by the 2G scam, it may have to take some confidence building measures to protect Indo-Russian relationship.

Many state owned companies from India have investments in Russia. Petroleum company ONGC has billions of dollars invested in oil fields in Russia. If Sistema issue is not resolved, Russia could take retaliatory action on Indian investment. That would needlessly upset the trade and investment momentum between the two countries.

Some signs are already there. It may not just be a coincidence that Russian aircraft carrier Admiral Gorshkov’s delivery to India has been delayed by a year to late 2013. India bought it from Russia for $2.3 billion and renamed it INS Vikramaditya. Officially the Russians say that it is fixing technical faults that cropped up during sea trials. But the reasons could be much deeper.

To maintain its economic options, India needs Russia as a counterweight against China and US. India will have to be proactive to ensure that the R in BRICS remains a close economic ally of India.

(Pranjal Sharma is a senior business writer. He can be contacted at [email protected])