Dividends of Indian Oil PSUs Are Stuck in Russia

What’s in today’s article?

• Why in news?
• What is Society for Worldwide Interbank Financial Telecommunication (SWIFT)?
• News Summary: Dividends of Indian oil PSUs are stuck in Russia
• Why the dividends of Indian oil PSUs are stuck in Russia?
• India’s investments in Russian oil assets
• Options available to Indian oil PSUs and associated challenges

 

Why in news?

• The dividend income of many Indian public sector oil companies from their investments in Russian projects are stuck in Russia since the war broke out.
  • The companies include ONGC Videsh (OVL), Oil India (OIL), Indian Oil Corporation (IOC), and Bharat PetroResources (BPRL).
• This is due to the payment channel-related issues in the aftermath of Russia’s February 2022 invasion of Ukraine.

 

What is Society for Worldwide Interbank Financial Telecommunication (SWIFT)?

• About
  • SWIFT is a cooperative organization headquartered in Belgium that provides a secure messaging network for financial institutions worldwide.
  •  It was founded in 1973 and operates a standardized system for transmitting financial transaction messages between banks and other financial institutions.
  • SWIFT has become a vital component of the global financial system, connecting over 11,000 financial institutions across more than 200 countries. 
  • It plays a crucial role in facilitating international transactions and promoting financial stability by providing a reliable and standardized means of communication between banks.
• Function
  • Its primary function is to facilitate the secure exchange of information and instructions related to financial transactions.
    • These transactions include money transfers, securities trading, and treasury operations.
  • It enables banks and financial institutions to communicate with each other in a standardized and secure manner, ensuring the integrity and confidentiality of the transmitted data.
  • While SWIFT facilitates the exchange of financial messages, it does not handle the actual movement of funds. 
    • The responsibility for executing transactions lies with the participating financial institutions.
• Working
  • The SWIFT network allows member institutions to send and receive messages using a unique identification code called the Bank Identifier Code (BIC). 
  • These messages contain instructions and details about the transfer of funds or other financial transactions. 
  • SWIFT ensures that these messages are securely delivered to the intended recipient and provides confirmation of receipt.

 

News Summary: Dividends of Indian oil PSUs are stuck in Russia

• Dividend income of Indian oil PSUs, amounting over $300 million, are stuck in Russia since the Ukraine war broke out.
• Indian companies were receiving regular dividend income from their investments in Russia until the invasion of Ukraine in February 2022.
• However, they have not been able to repatriate the dividend income since the war began.
  • Russian companies operating the projects are releasing dividends to their Indian partners.
  • However, the money is piling up in an Indian bank in Russia - Commercial Indo Bank (CIBL). 
    • CIBL used to be a joint-venture of SBI and Canara Bank, but the latter recently sold its stake in the venture to SBI.

 

Why the dividends of Indian oil PSUs are stuck in Russia?

• Payment channel-related issues
  • Soon after Russia invaded Ukraine, a number of major Russian banks were banned from the SWIFT financial transactions processing system.
  • This seriously constricted Moscow’s ability to access the global payments system.
• Curbs imposed by Russian government
  • The Russian government too has put curbs on the repatriation of dollars in a bid to keep exchange rate volatility in check.

 

India’s investments in Russian oil assets

• Amount invested
  • Over the years, Indian public sector companies have invested billions of dollars to pick up stake in producing oil and gas projects in Russia. 
  • These investments — adding up to almost $6 billion according to one estimate — are part of India’s energy security strategy.
    • India is heavily dependent on energy imports.
• Companies in which investments have been made
  • OVL, the overseas investment arm of Oil and Natural Gas Corporation (ONGC), holds a 20% stake in the Sakhalin-1 project and 26% in Vankorneft field. 
    • It also owns Imperial Energy, which has fields in Siberia. 
  • A consortium of IOC, OIL, and Bharat Petroleum Corporation’s (BPCL’s) upstream arm BPRL has 23.9% share in Vankorneft and 29.9% in Taas-Yuryakh Neftegazodobycha fields.

 

Options available to Indian oil PSUs and associated challenges

• The money can be used to partly pay for India’s ballooning purchases of Russian crude
  • This is challenging as IOC and BPRL’s parent BPCL do buy Russian oil, OIL does not.
  • Also, the investments in Russian projects are through special purpose vehicles (SPVs) registered in overseas territories like Singapore. 
  • This means that any payment dealing with Russian oil in this case would also come under the jurisdiction of overseas territories, and not just Russia and India.
    • There are various Western sanctions against Russia and its energy sector. 
    • Therefore, cross payments for Russian oil using this dividend income could end up becoming an extremely complex exercise from taxation and accounting standpoints.
• The dividend income could be for future investment in the same projects
  • But the challenge there is that the assets that Indian companies are invested in are past their major capital expenditure cycle, and are now producing assets. 
  • This means that major cash calls, or demand for more investment in the projects, are highly unlikely in the near-to-medium term.

 

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Q1) What is ONGC Videsh Limited (OVL)?

ONGC Videsh Limited (OVL), also known as ONGC Videsh, is the international arm of Oil and Natural Gas Corporation Limited (ONGC), which is India's largest oil and gas exploration and production company. OVL is a wholly-owned subsidiary of ONGC and was established in 1965. Its primary objective is to explore and produce oil and gas resources outside of India.

 

Q2) What is Russian currency?

The currency of Russia is the Russian Ruble (RUB). The ruble is the official currency of the Russian Federation and is represented by the symbol "₽" or "RUB". One ruble is subdivided into 100 kopeks, although kopek coins are not commonly used in everyday transactions.

 

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Source: More than $300 million dividends of Indian oil PSUs are stuck in Russia. Why — and what now? | SWIFT