Bilateral trade and investment relationship between India and Russia has been witnessing an upward trend. There are more than 300 Indian companies in Russia and a similar number of Russian companies in India. During April 1996 to February 2014, the cumulative Indian FDI in joint ventures (JV) and wholly owned subsidiaries (WOS) in Russia stood at US$ 4.1 billion, making it India’s largest investment destination in the CIS region. Similarly, Russian investments into India are also substantial, with the country being the 26th largest source of FDI into India.
Corporate entities have pointed out that accessing domestic currency financing by these JVs/WOS in each other’s country would enable them to avoid foreign currency exchange risks.
To facilitate this, Exim Bank of India and Vnesheconombank are contemplating establishment of a Reciprocal Bilateral Guarantee Facility lending in local currency. The objective is to ease access of domestic currency loans to identified Indian and Russian companies, so long as normal terms and conditions governing investments in India and Russia are complied with. This Guarantee arrangement between Exim Bank of India and Vnesheconombank promises to be a viable working mechanism that mitigates foreign currency exchange risks, since the loans would be in local currencies.
Thus, for instance, an Indian JV in Russia would typically be better off financing itself in Russian Roubles (RR) rather than US dollar (USD), so as to avoid currency risk. However Exim Bank (or any other bank in India) cannot lend in RR since it has no realistic borrowing source in RR. However, Vnesheconombank would be prepared to take up a credit risk exposure to Exim Bank of India, up to a limit as may be decided by them. The circle can thus be squared by Exim Bank extending a financial credit guarantee to Vnesheconombank, which would in turn lend in RR to the Indian joint venture. Exim Bank would sanction a guarantee limit of USD ‘x’ million, equivalent to RR ‘y’ million and agree that it would pay to Vnesheconombank on first demand any amount upto and inclusive of RR ‘y’ million on first demand of default.
The establishment of the facility would be a win-win situation for all – the Indian JV gets funding in RR, Vnesheconombank gets a good customer and mitigates its risk with Exim Bank’s guarantee, whose mandate of promoting India’s trade is also served.
Conversely, a Russian company investing in India would need INR funding. As long as the investment in India meets Exim Bank’s norms, it can fund in INR against a guarantee from Vnesheconombank (which has no branch in India and cannot do INR business). The transaction would operate in reverse from the above example but the principle would be the same. The Russian JV would get funding in INR, Exim Bank would get a good customer and mitigate its risk with a Vnesheconombank guarantee and Vnesheconombank would be fulfilling its mandate.
Exim Bank of India and Vnesheconombank have commenced working on the technical aspects of the Guarantee Facility and would keep businesses in respective countries advised once the Facility becomes operational.