India is likely to make its payments for Russian arms in euros to a Russia-nominated bank to bypass the threat of US sanctions for purchase of military hardware including the S-400 air defence missile system, people familiar with the details told ET.
While certain payments for existing defence transactions have been processed through the rupee-rouble route, the people said that a solution was firmed up this month with Russia’s VTB Bank agreeing to receive money in euros.
Over $4 billion worth of payments to Russia have bunched up for this financial year, with the biggest contract being the S-400 system, followed by the Chakra III submarine lease and the procurement of four frigates for the Indian Navy.
Besides, two additional Russian contracts are expected this year for the supply of AK 203 rifles to the armed forces that will be manufactured in Amethi and the inking of an Army contract to procure Ka-226 helicopters that will be produced by a HAL-Russian Helicopters JV.
Sources told ET that VTB Bank is open to using a European account for the money transfer. The Indian bankNSE -1.01 % selected for the transaction will have the least exposure to US currency. VTB Bank has processed large deals in India in the past few years, including the over $12 billion investment into the Essar Group that bailed it from bankruptcy.
As first reported by ET, while the Indian government has been clear that it will not move away from purchasing arms from Russia, the threat of US action under the controversial Countering America’s Adversaries Through Sanctions Act (CAATSA) had scared away financial institutions from processing transactions.
In April 2018, the State Bank of India put a stop to all payments after Russia’s flagship arms trading company Rosoboronexport came under sanctions by the US Office of Foreign Assets Control (OFAC), blocking over $2 billion that had to be transferred. While India found an alternate route for payments by using banks with minimal exposure to the US, the issue took over a year to resolve as Russian financial institutions too refused to be party to transactions that would threaten their global business.
Last year, alternative payment routes were found to transfer money for critical spares and repairs, including work on the INS Chakra nuclear powered submarine that had suffered an accident but a permanent route to send large amounts had remained elusive.
Despite the repeated threat of US sanctions, India has made it clear that it will not back off from the S-400 deal with Russian manufacturer Almaz-Antey that has been in Washington crosshairs for long. At the same time, India negotiated several defence deals with the US, including the purchase of air defence missiles for the national capital, armed drones and naval aircraft.