India, Russia weigh rupee-rouble trade for defence deals

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.


Breaking logjam ::

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.

 economictimes