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 Petro Resources (BPRL).
• This is due to the payment channel-related issues in the aftermath of Russia’s February 2022 invasion of Ukraine.

What’s in today’s article?

• SWIFT
• News Summary

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

• 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 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-YuryakhNeftegazodobycha 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 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.