India, Russia Seek to Skirt U.S. Sanctions Threat to Arms Deals

India, Russia Seek to Skirt U.S. Sanctions Threat to Arms Deals
Source: Bloomberg
India and Russia have agreed on a new payment method through their national currencies for multi-billion-dollar defense deals, in a bid to avoid risks created by the U.S. threat of sanctions and banking restrictions.

The arrangement would enable India to pay the first installment soon for two warships that Russia is building for its navy, two people familiar with the matter said in New Delhi, without elaborating. Defense contracts will be settled in rubles and rupees under a payment agreement reached by the central banks of Russia and India, said a person in Moscow with knowledge of the preparations.

While the new mechanism potentially opens the way for releasing billions of dollars in contract payments to Russia, it may still be dependent on India winning agreement from U.S. President Donald Trump not to impose sanctions in retaliation.

Russia has faced an uphill struggle to maintain sales by its strategic defense sector, which totaled $19 billion last year, partly because of U.S. sanctions that threaten anyone who buys Russian weapons. Even though the U.S. has applied those only once so far -- against China -- the fear has cast a pall over Russia’s export business. The world’s second largest arms exporter after the U.S., Russia suffered a 17% drop in foreign weapons deals from 2014-2018 amid declining purchases by India and Venezuela, according to the Stockholm International Peace Research Institute.

Seeking Waiver

An increasingly important U.S. partner, India also has long-time strategic ties with Moscow dating back to the Soviet era in the Cold War. Despite the decline in sales, Russia accounted for 58% of the south Asian nation’s arms imports from 2014-18. The U.S. has been pushing New Delhi, unsuccessfully so far, to cancel a more than $5 billion contract to buy Russian advanced S-400 air-defense missile systems, brandishing the threat of punitive measures.

Still, India is attempting to obtain a U.S. presidential waiver for its arms purchases. Turkey, a North Atlantic Treaty Organization member state, is facing the threat of U.S. sanctions over its S-400 purchase from Russia, which began delivery on Friday.

Delivery of the S-400 to India is planned to start after 2020 and “issues with payment have been resolved,” the Russian Federal Service for Military-Technical Cooperation said last month, according to the state-run Tass news service.

Promsvyazbank PJSC, a government-controlled Russian lender that has been tasked with financing the defense industry to shield the two biggest state-owned banks Sberbank and VTB from the threat of U.S. sanctions, is ready to play a role in the Indian transactions, the person in Moscow said.

India’s S-400 deal signed in October is among agreements with Russia that are cumulatively worth $10 billion. They include joint production of Kamov Ka-226T helicopters worth $1 billion, and four warships for the Indian Navy, with two of the vessels built in Russia and two at a shipyard in India under a technology-transfer agreement.

Indian Prime Minister Narendra Modi in March inaugurated a rifle plant in Amethi that will produce 750,000 Kalashnikov AK-203 rifles under a joint venture between India and Russia.

Modi and Trump didn’t discuss India’s S-400 deal when they met on the sidelines of the Group of 20 summit in Japan last month, Indian Foreign Secretary Vijay Gokhale told reporters after the talks. “No one issue is going to impact on the larger strategic relationship between India and United States,” he said.

Stopped Payments

After the U.S. sanctioned Russian state arms exporter Rosoboronexport in late 2017, the State Bank of India stopped payments to Russia for Indian arms purchases, a person familiar with the matter said.

The 2017 Countering America’s Adversaries Through Sanctions Act, called CAATSA, requires the imposition of sanctions on persons and entities that knowingly engaged in a significant transaction with Russia’s defense or intelligence sectors. The U.S. State Department decides whether a transaction is significant under the legislation, while the 2019 National Defense Authorization Act provides for a presidential waiver from sanctions.

Junior Foreign Minister Vellamvelly Muraleedharan on Wednesday told the Indian parliament that the country’s need for the S-400 had been “clearly conveyed” to the U.S. during Secretary of State Mike Pompeo’s visit in June.

The Bank of Russia didn’t respond to a request for comment. The State Bank of India and Promsvyazbank didn’t immediately respond to requests for comment. A spokesman for India’s Ministry of Defence declined to comment.

VTB late last month denied an Indian media report that it would process Indian payments in euros for the arms purchases, avoiding use of the dollar.

“It was clear from the beginning that it wouldn’t work either in euros because the global financial system is so dependent on the U.S. that no one will dare to do this,” said Ruslan Pukhov, head of the Center of Analysis of Strategies and Technologies, a defense-industry consultant in Moscow. “Russia is trying to resurrect practices we had in Soviet times by clearing in rupees and rubles,” Pukhov said.

A waiver from Trump “is unlikely as it would set an unsustainable precedent,” said Scott Jones, whose U.S.-based TradeSecure consultancy advises governments on arms export controls and sanctions. “Buying military equipment from Rosoboronexport constitutes a sanctions violation, so whether they’re transacting their business denominated in dollars or pesos or rupees it doesn’t change the scope of sanctions.”

By Nc Bipindra and Evgenia Pismennaya