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Journalism of Courage
Indian public sector oil companies are facing a $1.4-billion question: how to repatriate their dividend income that has been piling up in Russia for over three years now? The Indian government and the companies have been attempting to find a resolution, but success has so far eluded them.
While they are confident that the money is safe, as dividends from their investment in Russian oil assets are being deposited at regular intervals in the companies’ accounts in an Indian bank in Moscow, they have been unable to access and use it.
These stranded dividends originate from billions of dollars invested by Indian public sector oil companies over the years to acquire stakes in Russian producing oil and gas projects. These cumulative investments are estimated to be over $6 billion. This strategy forms a crucial part of India’s overall energy security plan, as India relies heavily on oil imports.
The Indian companies include ONGC Videsh (OVL), the overseas investment arm of Oil and Natural Gas Corporation (ONGC). OVL holds a 20 per cent stake in the Sakhalin-1 project and a 26 per cent stake in the Vankor project. OVL’s share of the stuck dividends is close to $400illion. Then there is the consortium of Indian Oil Corporation (IOC), Oil India (OIL), and Bharat Petroleum Corporation (BPCL) arm Bharat PetroResources (BPRL), which together hold a 23.9 per cent share in Vankor and a 29.9 per cent share in the Taas-Yuryakh project. This consortium’s cumulative share of the stranded dividends is the larger portion, around $1 billion, according to industry estimates.
Although the Indian companies continue to receive regular dividends from their Russian assets, they have been unable to repatriate this income since the Russia-Ukraine war commenced. The fundamental obstacle to repatriation is the payment channel-related restrictions imposed following Russia’s invasion of Ukraine in February 2022.
The dividend income is currently held in Moscow in accounts at the Commercial Indo Bank (CIBL), which is an affiliate of the State Bank of India (SBI). The funds are being deposited in rubles.
Soon after the outbreak of the war in Ukraine, numerous major Russian banks were barred from using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. Since SWIFT is essential for processing financial transactions globally, this ban severely compromised Russia’s ability to access the global payments system. Russia also restricted repatriation of US dollars out of the country in a bid to curb foreign exchange volatility.
Adding to the challenge are international jurisdiction issues. Some of the vehicles used by Indian companies to make their investments in Russian oil and gas assets are special purpose vehicles (SPVs) that are registered outside of India, often based in countries like Singapore.
Despite the issue being regularly discussed between the Indian companies and their Russian partners, and featuring in government-to-government discussions between New Delhi and Moscow, a viable resolution is still pending due to the various complications arising from Western sanctions targeting Moscow and its financial and energy sector.
Some industry insiders believe that a cessation of hostilities between Russia and Ukraine and easing of the West’s sanctions on Moscow might be the only way to access and repatriate or use the stuck dividends.
While repatriating the money to India is currently not possible, the Indian companies and the government have explored ways to access and utilise the funds within Russia. However, the options available are highly constrained.
One possibility is utilising the funds to make payments within Russia, while another is to use the money to fund operational and capital expenditure requirements for existing projects or to increase investments in Russia. Neither of these options appears feasible. The dividend payments are already released after the deduction of operational expenses. Furthermore, most ongoing assets are past their major capital expenditure cycle, meaning that a demand for significant new investment, or cash calls, is highly unlikely in the near-to-medium term.
The one potential exception involves OVL, which needs to pay approximately $600 million to Russia to secure its re-nomination as a shareholder in the Sakhalin-1 project. OVL has been actively negotiating with Russian authorities to use its stranded dividend income to partially settle this payment. But that, too, is stuck due to complications with dollar payments to Russian entities, it is learnt. Beyond this, the Indian companies are not seeking investments in any other Russian project.
The obvious alternative—using the stranded dividends to partially pay for the substantial volumes of Russian oil flowing into India—is also fraught with complexity. Several challenges prevent a simple cross-payment solution—while IOC and BPCL purchase Russian oil, OIL and OVL do not.
Also, because the investments were made through SPVs registered in overseas territories like Singapore, any payment involving Russian oil using these dividends would fall under the jurisdiction of those overseas territories as well, not just Russia and India. Given the existence of various Western sanctions against Russia and its energy sector, using the dividend income for cross-payments related to Russian oil would result in an extremely complex exercise from both taxation and accounting viewpoints.
To navigate this difficult financial landscape, the Indian companies have been seeking guidance from legal and international accounting experts, it is learnt. Ultimately, finding a workable and feasible solution will likely require a combination of ingenious commercial negotiations with stakeholders both inside and outside of Russia, alongside deft diplomacy.
