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India expects West sanctions on Russia to impact key sectors, defence, engg could take big hit

Source : The Print

India expects West sanctions on Russia to impact key sectors, defence, engg could take big hit
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Worries are mounting that wide-ranging Western sanctions on Russia will have a harsh impact on strategically important sectors in India, especially defence, central government sources told ThePrint. 

The government is still in the process of reviewing the sectors likely to be hit hardest by the sanctions and devising mechanisms to deal with the blow, multiple government sources confirmed. “While the government is discussing this matter on a regular basis internally through an inter-ministerial dialogue to assess the impact, it will, nevertheless, entail a tedious process of listing out all Russian entities that are covered under American, European as well as UN sanctions, separately,” a source said.

In a joint statement Saturday, the United States (US), the European Union (EU), the United Kingdom (UK), Italy, Germany, France, and Canada agreed on restrictive measures that will prevent the Russian central bank from using its foreign exchange reserves to undermine the impact of the sanctions. 

They also decided to cut off some Russian banks from the SWIFT inter-banking system, a move meant to isolate Russia from global trade.

Society for Worldwide Interbank Financial Telecommunication or SWIFT is a messaging system that facilitates cross-border transactions in a timely manner and has become the backbone of international financial trade.

The sources also said further sanctions are likely to be imposed on Russia by more countries, including the US.

Bilateral trade between India & Russia

According to the commerce ministry, India’s bilateral trade with Russia during 2020-21 amounted to $8.1 billion. Indian exports totalled $2.6 billion, while imports from Russia amounted to $5.5 billion.

While India exports electrical machinery, pharmaceuticals, organic chemicals, iron & steel, apparel, tea, coffee, and vehicle spare parts to Russia, it imports defence equipment, mineral resources, precious stones and metals, nuclear power equipment, fertilisers, electrical machinery, articles of steel and inorganic chemicals, from the country.

The sanctions will not only “deeply impact” India’s defence trade with Russia, they will “adversely impact” New Delhi’s trade with Moscow when it comes to other commodities such as engineering goods, automobile components, pharmaceuticals, telecom equipment and agricultural products, sources said.

The Indian Embassy in Russia, on its website, says several Russian banks have opened branches in India. These include VTB, Sberbank, Vnesheconombank, Promsvazbank and Gazprombank. Similarly, the Commercial Bank of India LLC, which is a joint venture of two major Indian banks — SBI and Canara Bank — is providing banking services in Russia.

India-Russia payment mechanism 

This is not the first time that economic sanctions have been imposed on Russia. In 2014, after Russia’s annexation of Crimea, the US and other western nations imposed economic sanctions, limiting the dollar trade between Russia and the rest of the world.

In 2019, India selected Chennai-headquartered Indian Bank for transacting with Russian bank VTB for payments for their imports. The idea was that these banks would have the least exposure to the US currency. It is unclear whether Indian Bank will be used for transacting with Russia under the current sanctions.

According to government officials who did not wish to be quoted, the move to oust Russia from SWIFT may disrupt trade with India, particularly that for fertilisers, which are crucial for the country’s agriculture sector.

One official said there is already a rupee-ruble arrangement that exists for government-to-government transactions. Therefore, that is unlikely to be affected by these sanctions and may continue for most payments, the official added.

Even in the aftermath of Western sanctions on Iran in 2012 because of its nuclear programme, India had designated Kolkata-based UCO Bank as the payment bank for Iranian oil. The account maintained deposits in euros, avoiding exposure to the US banking system.

Current crisis to have immediate effect on defence deliveries

India has a longstanding cooperation with Russia in the field of defence. The fear is that the new sanctions may have an impact on India’s defence imports, in the absence of a new payment mechanism.

In October 2021, a US Congressional report noted that the Indian military cannot operate effectively without Russian equipment and will continue to rely on Russian weapons systems in the short and middle terms.

However, data put out by the report had shown that there has been a steady decline in India’s defence trade with Russia since 2014, when the Russian crisis with Western powers erupted over the issue of Crimea.

While current tensions between Russia and Ukraine will have an immediate effect on the delivery of items paid for, government sources told ThePrint that sanctions on Russian banking channels could hit India’s ability to make payments and, hence, delay payments.

“Payments are done as per a schedule, like in all defence contracts signed with any firm or country,” a top source, who has in the past dealt with the Russians on the S-400 deal, said.

“No payment is done instantly. So, there are payments that must be made for various defence deals already contracted but the latest sanctions could make it more difficult.”

Currently, all Russian products manufactured in India, like the T-90 tanks by the Heavy Vehicles Factory in Tamil Nadu’s Avadi, Su-30 MKI by Hindustan Aeronautics Limited (HAL), infantry combat vehicle BMP2 by the Ordnance Factory Board (OFB), and the BrahMos missiles are through licensed production.

For these, India pays a royalty to the Russians, besides incurring cost on infrastructure and production, which at times makes it more expensive to manufacture here than to import directly from Russia.

ThePrint exclusively reported Monday that India’s concern is that the US may act tough in the coming days over deals with Russia, with Washington’s Countering America’s Adversaries Through Sanctions Act (CAATSA) hanging like the Sword of Damocles over New Delhi’s head.

The argument being that defence entities sanctioned by several countries in the latest round were already covered by those slapped by the US earlier. Hence, it will have to be seen how much legroom the West will give now for new projects.

“There is no waiver as such under CAATSA for India. It was to be case-by-case. Their focus was on major defence items and the trade for maintenance of existing Russian systems with India did not matter because they understood that India was dependent on Russia for it,” Amit Cowshish, former financial adviser to the acquisition wing of the Defence Ministry, told ThePrint. “Even for the frigates and the S-400, the Americans had turned a blind eye because it suited them.”

He added that while the US sanctioned both China and Turkey for taking delivery of the S-400, it had not done so against India till now.

For the S-400, India had issued what is officially known as a “non paper” to the Americans, detailing why the deal was important. India’s official stand was that the deal was in the works even before the CAATSA came into being and India goes only by UN sanctions.

Laxman Kumar Behera, associate professor at JNU’s Special Centre for National Security Studies, who closely studies India’s defence budget, told ThePrint that new sanctions against the Russian banking system and the move to oust the country’s banks from SWIFT will have a big impact on the ability of the two nations to carry on business as usual.

He said that making payments will become difficult and one will have to give it some time for things to settle down, and then see the impact on defence trade between the two countries.

Concerns over secondary sanctions

The Narendra Modi government, which has taken a guarded stand on the entire issue by not condemning Russia directly and pushing for “diplomacy and dialogue”, also believes that if “secondary sanctions” are activated, India will be “hit the hardest”.

The US reportedly is also contemplating imposing secondary sanctions on Russian entities and individuals.

Secondary sanctions are generally imposed by the US on non-American citizens who are found to be involved in dealing with certain activities such as “assisting, sponsoring or providing financial, material or technological support for, or goods or services to or in support of persons blocked pursuant to the Executive Order”, notes US-based law firm Holland & Knight.

“The sanctions imposed this time are huge and unprecedented. These are far tougher sanctions than ever before with far more participation by countries,” P.S. Raghavan, former ambassador of India to Russia and former chairman of the National Security Advisory Board, told ThePrint.

On the issue of secondary sanctions, he said, “Secondary sanctions are those imposed on a third country company that does business with sanctioned entities. CAATSA is an example of secondary sanction.”

“Secondary sanctions carry the potent threat of cutting off the company from all business with the US or US companies. No company would ever run the risk of ever attracting secondary sanctions,” he added.

Raghavan said “sanctions are basically deterrents”. “Russia is a storehouse for all kinds of natural resources and Europe heavily relies on Moscow for imports of oil and gas, aluminium and copper and other such items,” he added. “Strong sanctions are intended to achieve objectives quickly, so that they can be lifted as soon as possible.” 

“The sanctions will also impact the economies of those imposing them. China has also adopted a wait-and-watch approach on this issue. As of now, there is no indication that secondary sanctions will be imposed, but we have to be extremely watchful of these,” he added. 

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