In Face Of Additional Restrictions, India And Russia Are Working On A New Payment System For Defence Contracts

Following the imposition of fresh Western sanctions on Russian banking channels, Moscow and New Delhi are currently negotiating a new payment arrangement for previously ordered defence equipment, including the leasing of the third nuclear submarine.

According to sources in the Indian defence and security establishment, another source of concern is the strengthening of the Russian ruble against the rupee. This means that India’s payments to Russia would become more expensive.

Both the rupee and the Russian ruble had the same value in August of last year. However, the Russian ruble is now worth 0.75 rupees.

When asked about the impact of Western sanctions on India-Russia defence deals, Dmitry Shugaev, head of Russia’s Federal Service for Military Technical Cooperation (FSMTC), said payments are made in accordance with the terms of the contracts.

He was speaking on the sidelines of Army 2022, a Moscow-based international defence show.

“As a result of unfriendly countries’ anti-Russian campaign, domestic military-technical cooperation entities, prominent military-industrial complex firms, and financial institutions are subject to various sorts of sanctions.”

Payments in US dollars and Euros in arms export transactions have been restricted to a bare minimum in this regard,” he stated.

According to ThePrint, both India and Russia opted in 2019 to pay for defence contracts in local currency.

New sanctions leading to fresh challenges

Russia has been pushing for a rupee-rouble transfer as a payment scheme for defence transactions for several years, but India has been hesitant due to the Russian currency’s weakness. However, the Russian ruble has recently gained.

While India and Russia had worked out a simpler payment method, secondary sanctions put on Russia and other countries, including France, in response to its invasion of Ukraine have presented new obstacles.

The United States and the European Union have cut off seven Russian banks from SWIFT, the Belgium-based cross-border payment system operator, including one that was previously used by India for payments. The imposition of fresh restrictions and the deactivation of Moscow from SWIFT have had an impact on payment capability.

According to Russian sources, certain payments have slipped behind, and both Moscow and New Delhi are working together to find a solution.

“Today, Russian military exporters, like the rest of the economy, are operating in a new reality.” Large-scale construction is now underway. State companies and military-technical cooperation entities work constantly with our country’s financial institutions and overseas partners,” Shugaev added.

He went on to say that Russian anti-sanctions strategies include tailoring their approach to each consumer, offering appealing contract terms, modifying payment forms and providing more flexible schemes, forsaking the dollar and converting to other currencies, including national ones.

“Many of the anti-sanction measures created by Russia’s FSMTC are welcomed by our partners because they are generally consistent with their national strategic objectives,” he added.

According to sources, higher payments are an issue, but discussions are underway to ensure that no deliveries are impacted.

Russia has proposed using a SWIFT-like system established by its central bank. According to the Business Standard, it involves payments in rupees and rubles using Russia’s messaging system, SPFS.

Rupees will be placed in a Russian bank and changed into rubles under the proposal. However, whether the exchange rate would be set or floating is still up in the air.