Russia, India to bypass the dollar in defence deals

Presently, some $2 billion worth of arms deals are presently hitting a snag over how settlement is to be made for defence transactions between Russia and India as US sanctions stand in the way. The issue has led to the US Dollar being dropped as a means of payment, with the Ruble and Rupee being considered as alternatives.

The Economic Times reports:

New Delhi: Efforts to break the logjam over Russian defence deals because of US sanctions have zeroed in on a rupee-rouble transfer as the only way out but both sides are finding it difficult to find banking institutions through which such payments can be routed.

Financial sanctions by the US have hit India’s arms trade with Russia hard, with payments for weapons and equipment worth over $2 billion getting stuck, including those for critical projects such as the repair of leased nuclear attack submarine INS Chakra.

Senior officials told ET that after several rounds of consultations, it has become evident that a rupee-rouble transfer-–pegged on the exchange rate of an international currency—is the solution. As of now, India signs defence contracts with Russia for which payments are made in US dollars.

With US sanctions making this impossible, contract payments have been frozen since April. A top official said that a foreign currency-—say the Singapore dollar-—could be used as the benchmark and contract payments would be conducted directly.

However, the two nations are still struggling to find banks that would run the risk of facing US sanctions for transferring the money. Sources said that on the Indian side, the banks being talked to include Vijaya Bank and Indian Bank.

On the Russian side, its largest banking entity in India, Sberbank, was involved in talks. However, the Russian bank has not given any commitment on making the payments. A decision is still to be taken but the idea is to involve banks with the least exposure to American sanctions.

Other options that were looked at included payments to non-sanctioned entities in Russia after its flagship arms trading company Rosoboronexport came under sanctions by the US Office of Foreign Assets Control (OFAC).

“This option was decided against as it would have opened up a lot of legal and audit issues, especially as defence deals are looked at very closely. No one wanted to take a chance,” a top official involved in talks to resolve the issue told ET.

US sanctions ban business ties with entities designated as Specially Designated Nationals (SDN). After fresh notifications in April named Rosoboronexport, Indian banks were pressured into freezing all lines of credit (LoCs) to Russian arms companies, resulting in all deals coming to a halt.

Payments worth over $100 million were blocked in less than a month with payments of over $2 billion facing uncertainty. This includes a payment of over $15 million to Russia that would have been used to repair the damaged INS Chakra nuclear submarine that met with an accident in late 2016.

Also impacted are ongoing submarine repairs besides purchases of missiles and ammunition. The signing of a $5-billion deal to purchase the S400 air defence system from Russia is also under a cloud.

The US has imposed sanctions against Russia for interfering in the 2016 presidential election and its actions in Crimea, Ukraine and Syria.

India has long been one of Russia’s top military equipment customers going back nearly six decades, and another deal is in the works for India to purchase the S-400 SAM system from Russia, a deal worth some $5 billion.

During the past five years, 62 percent of India’s defense imports have been from Russia.

In addition to defence, India and Russia have a strong cooperation in areas of energy and communications, as well as their positions on international issues ranging from climate change to fighting terrorism, combatting Trump’s tariffs regimes, and the preservation of the Iran nuclear deal.

Russian investments in India encompass areas such as nuclear energy and telecommunications; Indian companies have invested heavily in Russian hydrocarbons and are involved in the joint exploration and extraction of oil and gas

A few weeks ago, in Sochi, Narendra Modi, the Indian Prime Minister, met with Russian President Vladimir Putin in an effort to boost their relations as well as to identify further areas of mutual interest. India seems also to be keen on potentially doing business within the EAEU, of which Russia is a member, further strengthening their trade relationship. Russia was also instrumental in getting India membership in the Shanghai Cooperation Organization (SCO), a Eurasian political, economic and security bloc.

Not only is India keen to preserve its business ties, whether Washington likes it or not, through diplomacy, but they are actively engaged in doing commerce with other nations which Washington has issued sanctions against, including Iran, also using national currencies in their bilateral trade, and Venezuela, so that dodging Washington’s demands relative to Russia is not the only example of India’s determination to stand up for its interests.

Recently, China debuted its Petroyuan, an oil futures market using the Chinese yuan instead of US dollars. Putin has called for Russia to move away from the dollar, asked the Europeans to conduct trade with Russia using the Euro, and developed its own SWIFT system for domestic transfers in order to avoid using the American based financial processing system.

China and Russia have been moving towards doing bilateral commerce using their national currencies, also avoiding the use of the USD. The more the US tries to use its currency, financial systems, and market share as a club, the more the nations of the world seek independence from it. In an economic sense, it is another way in which America is making itself irrelevant to the rest of the world.