Major Defence Agreements With Russia, Including S-400 Deal, Remain In Limbo Amid Payment Crisis

Abhay Rathore

Aug 21, 2023, 12:31 PM | Updated 12:31 PM IST

The Russian S-400 system. (Russian Defense Ministry Press)
The Russian S-400 system. (Russian Defense Ministry Press)

The major defence deals with Russia, including the S-400 deal, have been facing uncertainty and delays due to the ongoing war in Ukraine. The revised schedule for these deals remains unclear as efforts to resolve the payment crisis have not been successful so far.

Approximately $3 billion in payments are currently held up, and the central banks are working to find a resolution, as reported by The Hindu.

Out of the five S-400 regiments that were contracted under a $5.43 billion deal in 2018, three have been delivered, while the remaining two are facing delays. The revised schedule for their delivery is still unknown.

Both sides have attempted to settle payments through a Rupee-Rouble arrangement, but this has not resolved the crisis due to the significant trade imbalance and accumulation of Rupees on the Russian side. One of the sources stated that once the payment schedule is clarified, a new delivery schedule can be determined.

According to Alexey Rakhmanov, the Director-General of United Shipbuilding Corporation of Russia, the delivery of two Krivak or Talwar-class stealth frigates being constructed for the Indian Navy in Russia has been further delayed. They are now expected to be delivered by May and October 2024.

Rakhmanov acknowledged that payment has been a significant issue. Regarding two other frigates being constructed at Goa Shipyard Limited (GSL) under the same deal, he mentioned that the delivery schedule will be determined based on the payment schedule. Originally, GSL was supposed to deliver the first ship in 2026, followed by the second ship six months later.

After Russia was excluded from the global SWIFT system for money transfers starting from February 2022, India and Russia decided to settle payments using the Rupee-Rouble route. This alternative method was extensively discussed between the central banks of both countries. While smaller payments have resumed, larger payments are still stuck, affecting various significant deals that are currently in the pipeline.

According to a source, some deliveries have been made despite delayed payments. However, in order to continue with further deliveries, a solution needs to be found. Companies and traders are concerned about sanctions, which continue to hinder the expansion of trade. The Reserve Bank of India should address these concerns to promote bilateral trade. It is acknowledged that a multi-pronged approach is necessary to resolve this issue.

In February, the Russian envoy in India, Denis Alipov, mentioned that vostro accounts have been established and a mechanism for Rupee-Rouble trade has been put in place. However, many Indian banks are being overly cautious due to the fear of secondary sanctions from the U.S. It is now up to the banks to utilize this mechanism.

India signed a deal in October 2018 to procure five S-400 regiments at a cost of $5.43 billion or Rs 40,291 crore. However, the operationalization of the deal faced delays due to concerns about possible US sanctions under the CAATSA law. The ongoing Ukraine war has further complicated the situation, leading to delayed milestone payments.

In a written reply to the Parliament in July 2019, the government stated that the deliveries of the S-400 systems were expected to be completed by April 2023. Earlier this year, officials expressed confidence that the deliveries would be finished by the end of the year or early 2024, with no further delays.

According to a report from the Parliamentary Standing Committee on Defence in March, the Indian Air Force (IAF) informed the committee about a major project that had been halted due to the ongoing war.

The IAF representative explained that a significant delivery scheduled for this year would not take place as the supplier had informed them in writing about their inability to deliver. This setback has resulted in a reduction in the projected budget estimates for this year compared to the previous year.

From 2018 to 2021, India and Russia engaged in a defense trade worth approximately $15 billion. This included significant deals such as the procurement of S-400 missiles, stealth frigates, AK-203 assault rifles, and emergency purchases following the Balakot air strike in 2019 and the 2020 stand-off with China in Eastern Ladakh.

Abhay Rathore is Staff Writer at Swarajya.

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