Rupee-Rouble Ruckus: US Embargo a Stumbling Block for Russian Military Supplies to India

India has enjoyed a long history of mutually beneficial relationship with Russia. Today, India is the world’s largest buyer of military hardware from Russia, accounting for 20% of Moscow’s orders. This works out to $ 13 billion worth of Russian defence equipment over the past five years. But the reality of why India needs to work with Russia is far more complex than one can imagine. It all has to do with its attempts to build an economy and military powerful enough to counter its biggest threat—its neighbour China….

By Girish Linganna

Admin Foreign Affairs

Russian Military Supplies to India have been suspended due to difficulties in finding payment mechanisms that comply with US sanctions, a Times of India report says citing Indian officials briefing on the matter. With the bilateral payment system still not streamlined in the backdrop of Western sanctions, especially for defence deals, payments for more than $2 billion worth of Indian weapons have been held up for about a year, according to officials.

 

As Russia remains India’s major supplier of weapons, which it needs to stem Pakistani and Chinese aggression, Russia poses a major challenge to India. The problem arose when India was unable to pay bills in dollars due to fears of secondary sanctions. Meanwhile, Russia is reluctant to accept rupees due to exchange rate fluctuations, while India is reluctant to complete the trade for fear of not being able to buy enough Russian roubles at a fair price on the open market. One proposed solution is to transact through euros and dirhams, which are used to pay for Russian crude imports by India at a discount, but that could expose the country to greater US sanctions scrutiny. With the doors of the global SWIFT system for money transfers being shut on Russia’s face, India and Russia agreed to carry out transactions through a rupee-rouble arrangement, after trying out the euro, as well. However, this led to an accumulation of Indian rupees in Russian banks, given the large volume of payments and both the countries discussed ways to enhance Russian sourcing from India.

As Russia remains India’s major supplier of weapons, which it needs to stem Pakistani and Chinese aggression, Russia poses a major challenge to India. The problem arose when India was unable to pay bills in dollars due to fears of secondary sanctions

The Indian government had suggested that Moscow invest the rupees from arms sales in the Indian debt and capital markets to avoid hoarding of the rupees, but this did not appeal to the Russian government. The issue of arms payments has recently become more topical and dominated discussions when National Security Adviser Ajit Doval visited Moscow earlier this year. The issue was also highlighted in talks in Delhi last week between Russian Deputy Prime Minister Denis Manturov and Foreign Minister S Jaishankar, who said more needed to be done on the rupee settlement issue.

 

No Spares to Spare

In addition, with the war in Ukraine entering its fourteenth month, the Indian armed forces are feeling the pinch of not getting spares and ammunition in a timely manner from the Russians, as acknowledged by officials recently. Russia has cut off loans for about $10 billion worth of spare parts and a pipeline for two batteries of the S-400 missile defence system that are yet to be delivered. India currently has more than 250 Russian-made Su-30 MKi fighter jets, seven Kilo-class submarines and more than 1,200 Russian-made T-90 tanks—all with a 10-year life expectancy and in need of spare parts. India’s air force, which is dependent on Russia’s fleet of fighter jets and helicopters, is among the segments hit hardest by supply disruptions from Moscow.

Russia remains India’s largest supplier of military hardware, despite a 19% drop in purchases over the past five years due to sanctions and increased competition from other manufacturing nations. India fine-tuned its diplomatic response to Russia’s war in Ukraine, calling for a ceasefire while abstaining from a UN resolution condemning the invasion. The war will take centre stage when Prime Minister Narendra Modi hosts the G-20 leaders in September this year. This meeting could prevent India from immediately turning against its arms payment mechanism with Russia. The US and other industrialized nations see India as a barrier to China’s growing military and economic assertiveness and have offered to supply defence equipment.

 
Russia remains India’s largest supplier of military hardware, despite a 19% drop in purchases over the past five years due to sanctions and increased competition from other manufacturing nations

However, it will take years for the country to be free from Russian weapons while maintaining a credible defence position. While President Joe Biden’s Administration has largely refrained from punishing India over its ties to Russia, it has taken some steps—such as last September’s inclusion of a Mumbai-based petrochemical company for buying oil products from Iran, in the sanctions list. That having been said, the US is preparing a military aid package for India worth reportedly $500 million to reduce India’s long, historical dependence on Russia for military equipment. If the deal materializes, India would become one of the largest recipients of US military aid, behind only Israel and Egypt.

-The writer is a Defence and Aerospace Analyst. The views expressed are personal and do not necessarily reflect the views of Raksha Anirveda