Chandigarh: For the first time since Russia’s invasion of Ukraine in February 2022 put unprecedented strain on its own arms supplies, Moscow has admitted that its defence industry is facing “pressing challenges” and needs to prioritise “manufacturing and supplying products to the Russian Army”.
But the potential silver lining in this for countries like India is that Russia is proposing a “new format” for weapons exports that might involve greater Russian willingness to part with technical and manufacturing knowhow so that “partner countries get opportunities to launch full-scale production on their territory and develop their own industrial base.”
In an official press release on October 19, Russia’s joint stock arms export company Rosoboronexport admitted to the “pressing challenges faced by the country’s defence industry and the system of military-technical co-operation”.
Consequently, it said it was offering its potential foreign partners “new formats of cooperation within the global arms market trends” that included ‘technology partnerships’ which the corporation estimated would double to 40% by 2030.
Rosoboronexport head Aleksandr Mikheyev declared that his conglomerate had “strong competencies in launching licenced production, setting up joint ventures and conducting joint research and development with foreign customers”. Such an arrangement, the press release added, provide partner countries the opportunity to “launch full-scale production on their territory and develop their own (military) industrial base”.
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The press note provided numerous such examples, only with regard to India, that included the licenced production and maintenance of Russian Sukhoi Su-30 MKI fighters, main battle tanks-like T72s and T90Ss- Boyevaya Mashina Pekhoty (BMP) 1/ 2 infantry combat vehicles, Ak-203 assault rifles and assorted tank and other ammunition.
Time for India to reduce dependency
Responding to the Rosoboronexport declaration, a cross-section of military and defence industry officials in New Delhi said it was an “admittance” by Russian defence companies of their inability to “effectively” continue delivering military equipment to their overseas clients, due to Moscow’s urgent needs to execute its Ukraine campaign in which it had suffered repeated setbacks.
“Rosoboronexport is now publicly stating what was known to the Ministry of Defence and military officials soon after the Ukraine war began in February 2022 – that Moscow would be unable to realistically sustain India’s sizeable defence equipment needs,” said a senior defence industry official. It’s now out in the open, he declared, declining to be named, adding that it was “crunch time” for India’s atamnirbhar initiative to indigenise its weaponry requirements and rapidly reduce dependency on Russia.
Russia remains India’s largest military hardware supplier, with over 65% of its current assets like fighters, helicopters, submarines, tanks and infantry combat vehicles, varied missiles, ammunition and ordnance sourced from Moscow. According to the Stockholm International Peace Research Institute (SIPRI), India had acquired $39 billion worth of materiel from Russia over the past two decades, either imported directly or licence-built domestically through a transfer of technology.
But, in recent months India’s military, despite a sanguine façade, has been confronted with grave uncertainty and delays over deliveries of Russian materiel and spares, as both sides had struggled to evolve a dependable payment structure that was not violative of US-led sanctions on Moscow.
An Indian Air Force. Sukhoi Su-30MKI aircraft. Photo: Mike Freer/Wikimedia Commons, GFDL 1.2 or GFDL 1.2
Official sources claimed that over $3 billion owed to Russia by India for an assortment of platforms, spares and related apparatus for in-service equipment had accumulated over 12-14 months leading to Moscow ‘pausing’ all further credit to Delhi for its defence buys. The rupees that had piled up under the mutually agreed rupee-rouble payment protocol had been routed via ‘vostro’ accounts through Russia’s Sherbank and VTB Bank respectively.
However, since late 2022 this state of affairs has been roiled further by massive payments, also in rupees, for Russian oil imports which had increased 50-fold after the Ukraine invasion. Last month Russia’s foreign minister Sergei Lavrov reiterated that Moscow faced the problem of a rupee surfeit that was “not currently usable”. He told reporters at the G20 summit in Delhi that these rupees needed “transferring” to another currency, and that an alternate arrangement was under discussion with his counterpart S. Jaishankar.
Jaishankar, for his part, has also conceded that there was “understandable concern” over the trade imbalance between Russia and India for defence equipment and told the India-Russia Business Dialogue in Delhi that the two countries needed to cooperate on a “very urgent basis” to address this predicament.
Over the past few days, India has turned down Russia’s proposal to settle its oil bills – and possibly, even its military equipment outstandings – in Chinese yuan. But alongside, it had seemingly also not finalised a workable solution to this predicament, as Indian banks continued to be ‘wary’ of exploring other forms of payments to Russia, via other currencies, for fear of inviting secondary sanctions from the US and its allies. Earlier, India had even proposed that Russia utilise the rupees from its weapon sales to invest in Indian debt and capital markets, but Moscow rejected the proposal.
Also read: Why Russian Exporters Are Reluctant to Use Vostro Facility to Invest Rupees in Indian Markets
Meanwhile, the enduring payment crunch, according to senior Indian defence officials, had adversely impacted the already deferred delivery of two of five Almaz-Antey S-400 Triumf self-propelled surface-to-air missile systems and four Admiral Grigorovich Project 1135.6M frigates – two of which were to be constructed indigenously, under a transfer of technology.
The US$3 billion leasing of another Project 971 ‘Akula’ (Schuka-B)-class nuclear-powered submarine and providing some 70,000 Kalashnikov AK-203 7.62x39mm assault rifles, ahead of local licence building 601,427 of them, too were delayed.
Both countries, however, have had some past commercial experience in bypassing sanctions.
In August 2019, Russia’s VTB Bank reportedly signed currency deals with counterparts in India and China in a deft manoeuvre to dodge the Washington-imposed Countering America’s Adversaries Through Sanctions Act or CAATSA in 2017 that embargoed Russia’s defence industry following Moscow’s take-over of Crimea and its alleged interference in the 2016 US elections.
According to Russia’s Izvestia newspaper at the time, the payment method included the application of ‘gateways’ to circumvent the international Society for Worldwide Interbank Financial Telecommunication or SWIFT banking system which now stands sanctioned for Russia. However, it is unclear whether India’s arrangement with VTB still persisted and if so, whether it could be exploited.
A year earlier, in August 2018 India and Rosoboronexport had entered into an agreement by which the public sector Syndicate Bank in Delhi – unexposed to US banking or financial institutions – agreed to directly transfer rupees/roubles to Russia’s Sberbank, doing away with normally routine letters of credit or LCs. Thereafter, the first tranche of the equivalent of $40 million was transferred in rupees/roubles in September 2019 as payment for the retrofit of one Indian Navy ‘Kilo’-class boat. Sberbank has since been sanctioned, foreclosing it thereby as an alternative payment route for India.
Since the mid-1960s India acquired over $70 billion worth of weaponry and related defence gear from Moscow. Till around the early 1990s, this military commerce was conducted via the rupee-rouble route and through barter; India supplied Moscow tea, sugar, toothpaste, footwear, socks and other similar food and everyday items that were then in short supply in the Soviet Union. In exchange, India received combat platforms like fighters, helicopters, transport aircraft, tanks, submarines and warships.
After the Soviet Union’s break-up in 1991, Russia and India switched over to trading in US dollars. After protracted negotiations lasting several years the two ‘rationalised’ India’s rupee-rouble debt and other past financial discrepancies in an eventual settlement around 1996, determining that India owed Russia around $50 million. The deadline for reimbursing this hoary liability was fixed at 2037 but remains bedevilled by complications.
Nonetheless, with Rosoboronexport now expressing its inability, albeit subtly, to provide defence equipment to its overseas clients – of which India remains by far the biggest– knotty issues of payments could, in time, be a thing of the past; though this process will likely take more than a few years.
