Following the income generated from the sale of significant quantities of crude oil to India, it appears Russia has determined a method for utilizing the accumulated Rupees

The impasse concerning the currency of payments has led to a delay in the delivery of two sets of S-400 surface-to-air [NATO codename SA-21] missile systems. To expand some of its Rupee reserves, Russia has now commissioned 24 cargo ships from an Indian shipyard.

The collaboration between Goa Shipyard Limited [GSL] and the Russian Export Center was announced during a visit of Russian officials to India, to discuss the schedule for delivery of the remaining two S-400 batteries.

By 2027, it is anticipated that the Government of India-owned military shipbuilding company, GSL, will complete the assembly of 24 marine vessels destined for cargo transportation across the Caspian Sea. This projection was announced by Dmitry Dubovik, director of the Caspian International Integration Club “North-South,” during an international forum in Astrakhan on October 25.

This agreement is projected to benefit both India and Russia who are aiming to maintain trade relations despite facing sanctions from Western countries. During the fiscal year 2022, Indian exports to Russia encompassed 3,139 commodities, inclusive of machinery, chemicals, seafood, and pharmaceutical goods, amounting to a total value of US$3.14 billion. Conversely, India’s imports from Russia in the fiscal year 2022 included 1,225 goods such as crude oil, petroleum-based products, precious gemstones, and vegetable oils, reaching a total valuation of US$46.21 billion.

However, the imposition of sanctions has engendered issues for both nations. A 2022 report from Bloomberg disclosed that Russia was barred from the SWIFT network and had its foreign currency reserves frozen, effectively isolating it from the worldwide financial system. India, due to concerns about facing secondary sanctions, has declined to make payments to Russia in US dollars and has refrained from transacting in Roubles due to apprehensions about securing Russia’s currency on the global markets at a reasonable rate.

The report elucidated that the stalemate over the choice of currency between India and Russia has led to a delay of more than a year in India’s payments totalling over US$2 billion. As a reciprocal measure, Russia has suspended the line of credit necessary for India to procure US$10 billion worth of spare parts and two S-400 air-defence systems, the report stated.

Due to a mutual agreement between the two nations, payments for S-400s would be processed in Indian Rupees as a means of minimizing the reliance on the US Dollar. Yet, the ongoing conflict between Russia and Ukraine has led to significant financial isolation for Moscow.

Politico indicates that up until September 2023, India’s acquisition of crude has exceeded the half-billion barrels mark—a staggering escalation of nearly ten times since 2021, the year preceding the war. This data is as per the numerical analysis conducted by Kpler, an analytics firm. Consequently, Moscow is amassing approximately US$1 billion worth of rupees every month.

In an admittance of the predicament, Sergey Lavrov, the Russian Foreign Minister, stated, “We’ve stockpiled a substantial volume of rupees for which an application has yet to be discovered.” He revealed this following a media briefing conducted post the G20 summit held in New Delhi.

One noteworthy challenge impeding India’s ability to conduct transactions in its own currency is the partial convertibility of this currency. For larger financial exchanges, authorization must be sought from the central government in New Delhi. However, India has devised an innovative solution to circumnavigate this obstacle — the reinvestment of rupees within the country’s own economy.

This arrangement proves highly attractive for conflict-embroiled Russia, which remains in constant pursuit of long-term investments and returns. These financial boosts are vital for maintaining the operation of Russia’s military apparatus.

The Compromise

The historic military alliance shared between New Delhi and Moscow has been a constant, even amidst the zenith of the Non-Alignment Movement [NAM]. Indeed, India has functioned as a premiere recipient of a host of advanced systems from the former Soviet Union, including MiG-21s.

This relationship has not flown under the radar of Western nations. An insightful report from the House of Commons in the United Kingdom recently underscored the necessity of consciously mitigating this reliance.

India’s military infrastructure shows considerable reliance on Russia. A 2020 working paper by the research-focused Stimson Center illuminated that an estimated 70 to 85 percent of India’s military systems bear Russian roots. Notably, India’s current aircraft carrier, the INS Vikramaditya, arose through the adaptation of a decommissioned cruiser carrier from the Russian Navy. Furthermore, the Russian Su-30 constitutes the linchpin of the Indian Air Force, a fact the report acknowledges.

The report apprehends India’s endeavors to diverge from Russian procurement for its military needs. It proposes that, as a component of the 2030 roadmap with India, the UK needs to assist India in accomplishing this ambition. According to the report, “The Indians recognize the pain induced by the Russian dependency, the complications it generates, and the consequent vulnerability concerning China.”

The attempt by India to broad-base its defense import portfolio is demonstrably evident in statistical data. As of 2018, reliance on Russia for defense imports accounted for approximately 35% of total imports, a significant decrease from earlier figures. While equipment of Russian provenance still constitutes 70% of India’s military hardware, this overwhelmingly pertains to older, rather than newer, gear. Amongst newly procured defense systems, the S-400 order from Russia plays a noteworthy role.

The year 2018 marked a major shift in defense alliances when India sealed a deal worth US$5 billion with Russia, signing up for the S-400. This agreement despite potential backlash from the United States, walked a fine line within the ambit of the Countering America’s Adversaries Through Sanctions Act. This act, promulgated in 2017, mandated the imposition of new sanctions on Iran, Russia, and North Korea.

Interestingly, the US official response was noticeably restrained following the confirmation, in December 2021, of the delivery of the S-400 system during the visit of Mr. Putin to New Delhi.

An echo of India’s stance on the acquisition’s necessity in opposing the Chinese menace is notable in the US Congress. In his confirmation hearing, James O’Brien, President Biden’s nominee for managing sanctions policy in the State Department, stated that while the United States discouraged this acquisition, any possible sanctions on India necessitated a balanced examination of “important geostrategic considerations, particularly regarding China.”

The missile, proclaimed by Russia, can wipe out and spot targets flying between 100 to 40,000 feet. It possesses a rapid activation ability, potentially going from standstill to launch-ready within minutes. The missile systems and launchers come mounted on all-terrain trucks. The Indian Air Force has successfully integrated three S-400 air defense missile squadrons along its borders with China and Pakistan.

In the wake of Russia’s military aggression towards Ukraine, India not only refrained from denouncing Moscow but also proceeded with the procurement of Russian oil at reduced prices. Critics perceived this as a blatant infringement of sanctions aimed at debilitating Moscow’s economy.

India has evaded criticism from Western nations for its close ties with Russia. The US has labelled India as the “lynchpin” of its Indo-Pacific strategy to offset China’s ascendency. Furthermore, it appears that the US appreciates India’s historically unique relationship with Russia – a relationship stemming from a time when India could not count on US partnership.