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US sanctions are affecting India-Russia defense deals: MoD source

March 9, 2017 (Photo Credit: Alexander Nemenov/AFP via Getty Images)
NEW DELHI — U.S. sanctions imposed on Russia are affecting Indian weapons procurement because Moscow is unable to furnish bank guarantees required by Indian law, according to a source in the Ministry of Defence, who spoke on condition of anonymity.

The Obama administration imposed sanctions against Russia in 2014 in concert with Europe to punish Russian President Vladimir Putin for his annexation of Crimea.

"Payment for half a dozen defense deals have been stuck (on account of US sanctions against Russia)," the MoD source said.

The source refused to provide details of the affected weapons programs due to the nature of their sensitivity, but the source did warn that additional defense deals between India and Russia could be affected in the future as a result of U.S. sanctions and the inability of Russia to furnish required bank guarantees.

In making the case for changes to Indian law, Ruslan Pukhov, director of the Moscow-based Centre for Analysis of Strategies and Technologies, said: "There are always exceptions from any rules. The question is whether Indian authorities are ready to do it for Russians.

"To best of my knowledge it is not a problem at all. Europeans and Israelis are ready to integrate their components and sub-systems for all Russian platforms for India. Since India is a biggest democracy in the world. They do it even for countries like Algeria," Pukhov added.

"As for the situation with banks, India, indeed, fears that the Americans might impose sanctions on them [banks] but I don’t have the slightest doubt that this obstacle can be overcome," he told Russian news agency TASS.

An MoD official explained that in order to provide a bank guarantee from an Indian bank, a corresponding Russian bank must be tied up with the Indian bank. "The Russian banks (first class banks) are under sanctions from U.S., and possibly, therefore, the Indian banks are unable to work with the Russian banks," the MoD official said. "So, it's a Catch-22 situation."

"Banks form part of an international system and are therefore bound by sanctions, etc. Hence, I think this is going to cause complications for which some alternative needs to be found," offered Anil Jai Singh, a retired Indian Navy commodore and defense analyst.

Russian Embassy diplomats here were unavailable for comment.

"The matter will need to be dealt at the diplomatic level, as the sanctions seem to entail difficulties not only for Russia but also for India," said Amit Cowshish, MoD's former additional financial adviser.

The MoD is yet to finalize a clear-cut solution to solve the "impass," the MoD official said. "Change in the procurement law can be one of the immediate ways which could also included giving a waiver to the Russians to furnish bank guarantees."

Cowshish noted that it's hypothetically possible to accept a corporate guarantee in lieu of performance-cum-warranty guarantee, or even advance payments, if the Indian government so decided, but "I do not think it would be easy to do so, especially in multi-vendor situations."

Since the early 1960s, India is estimated to have acquired military equipment worth billions of dollars from Moscow, which now forms more than 60 percent of equipment on the inventory of the three services.

Serviceability of these systems is one problem area due to a lack of adequate spares.

In October 2015, India and Russia agreed on defense pacts worth $10 billion that included the purchase of S-400 Triumf air defense systems and four stealth frigates, as well as the formation of a joint venture to manufacture Kamov-226T light utility helicopters in India.

Prior to that, a major defense deal between India and Russia worth $1.6 billion was signed in 2012 for India to purchase 42 Sukhoi Su-30MKI fighter jets, and a $1.3 billion contract was inked for the delivery of 71 Mi-17V-5 helicopters.

"Russia remains vitally important in several respects, including in terms of combat aircraft, nuclear propulsion and surface-to-air missiles. The relationship will remain solid for the foreseeable future even as both parties seek other partners for their export or import needs," according to Dhruva Jaishankar, a foreign policy fellow with Brookings India.

While the U.S. sanctions have created problems in procurement, for the most part analysts and military officials here agree the issue will somehow be circumvented.
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