Major defence deals with Russia, especially the S-400 deal, which have already seen delays due to the war in Ukraine continue to face uncertainty with no clarity on the revised schedule as efforts to resolve the payment crisis haven’t fructified so far. Currently payments of around $3 billion are held up and the central banks are working to resolve this, two official sources independently said.
Three of the five S-400 regiments contracted under a $5.43 billion deal in 2018 have been delivered but the other two are delayed and there is no clarity on the revised schedule, multiple sources confirmed. While the two sides have been trying to settle payments through a Rupee-Rouble arrangement, it has failed to solve the crisis due to the huge trade imbalance and Rupees accumulating on the Russian side. The revised delivery schedule can be worked out once there is clarity on the payment schedule, one of them said.
As reported by The Hindu last week, delivery of the two Krivak or Talwar-class stealth frigates under construction for the Indian Navy in Russia are further delayed and now expected to be delivered by May and October 2024, according to Alexey Rakhmanov, Director-General of United Shipbuilding Corporation of Russia. Acknowledging that payment has been an issue, on two other frigates under construction at Goa Shipyard Limited (GSL) under the same deal, he said the delivery schedule will be fixed according to the payment schedule. As per the original schedule, GSL was scheduled to deliver the first ship in 2026 and the second one six months later.
With Russia being shut out of the global SWIFT system for money transfers after February 2022, India and Russia chose the Rupee-Rouble route to settle payments which was extensively discussed between the central banks of the two countries. While small payments have been resumed, larger payments are still stuck, with several big-ticket deals in the pipeline.
Some deliveries have been done despite payments being held up, and now there has to be a way out before further deliveries can be done, one of the sources cited above stated. In addition, there is unnecessary apprehension among companies and traders on sanctions, which is preventing trade from expanding, the sources said adding that the Reserve Bank of India needs to step in to clear the apprehensions so bilateral trade can increase. Officials conceded that there needs to be a multi-pronged approach to resolve this and no single measure would be sufficient.
On similar lines, in February, Russian envoy in India Denis Alipov said that the vostro accounts have been opened and the mechanism of Rupee-Rouble trade has been established and it is now a matter for the banks to use it while terming that many Indian banks are “over cautious” for fear of any secondary sanctions from the U.S.
In a related move, early August, one of Russia’s largest banks, VTB, started opening accounts in Rupees, and Anatoly Penchatnikov, deputy chairman of the board of VTB said that the bank has expanded the list of currencies available to retail customers and now they can open an account and make exchange in Rupees.
Officials also dismissed speculations of possible use of Yuan, noting that even in the oil purchase by one of the public sector companies reported recently, the Chinese currency was used only for one transaction.
S-400 deal
India had contracted five S-400 regiments under a $5.43 billion deal, or ₹40,291 crore as per conversation rate of ₹74.2 against the Dollar when it was signed in October 2018. Even then, its operationalisation got delayed as the sides sought to avoid payments in dollars as possible threat of U.S. sanctions under CAATSA (Countering America’s Adversaries Through Sanctions Act) loomed large. The Ukraine war has further compounded the problem. The ‘milestone payments’ which are periodic payments made against deliveries have been delayed, as reported earlier.
In July 2019, the government said in a written reply in the Parliament that S-400 deliveries are “likely to be made by April 2023”. At the beginning of this year, officials said that deliveries are expected to be completed by year-end or early 2024, and would not be further delayed.
As per a report of the Parliamentary Standing Committee on Defence tabled in March this year, the Indian Air Force (IAF) informed the committee that there is a “major project” where the “deliveries have been stopped because of the war going on.” “We had a major delivery in this year, which is not going to take place. They have given us in writing that they are not able to deliver it. That is why the major part of projection has been reduced,” an IAF representative informed the committee while appraising them regarding the sharp decline in Budget Estimates this year as compared to the last year’s projection. Official sources had confirmed that the IAF was referring to the S-400 deal.
As per the revised Budget Estimates of 2022-23 too, the IAF had returned close to ₹2,370 crore which is part of committed liabilities but could not be completed.
For instance, from 2018 to 2021 the defence trade between India and Russia was worth around $15 billion as several big-ticket deals were concluded including S-400, stealth frigates, AK-203 assault rifles and emergency procurements in the backdrop of the Balakot air strike in 2019 and the 2020 stand-off with China in Eastern Ladakh.
