A currency impasse has frozen Russia's arms trade with India

Russia is unwilling to opt for rupee-trade mechanism due to volatility in the rupee-ruble exchange rate.
A currency impasse has frozen Russia's arms trade with India
Photo: POOL (Reuters)
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India’s military trade with Russia has come to a halt following an exchange rate impasse, with up to $2 billion reportedly remaining unpaid over the past year.

For instance, two S-400 air defense systems India placed an order for in 2018 remain undelivered, according to a bulletin by American Foreign Policy Council.

Spooked by the volatility in rupee-ruble exchange rate, the south Asian power’s largest defence supplier has even stopped a $10 billion line of credit for spare parts.

The threat of US sanctions dangles over India

The sticking point for India is a potential violation of US sanctions if it pays Russia in US dollars. And Russia is unwilling to go by the rupee-trade mechanism as the ruble has risen nearly 8% against the rupee in the past financial year. That means lower earnings for Russia, eroding its competitive advantage over India.

New Delhi’s own rupee-trade mechanism has not found many takers yet.

While India can settle its arms trade in euros and dirhams, which are generally used for discounted Russian oil, that could evoke secondary sanctions from the US. These are aimed at discouraging companies or countries from engaging in specific transactions with countries facing primary sanctions.

Trading in other currencies will also increase India’s costs due to unfavourable exchange rates, officials told Bloomberg.

India is gradually reducing defence imports from Russia

One of India’s oldest and sturdiest defence trade partners, Russia’s annual arms exports to the country ballooned by more than 450% in fiscal 2023 to $5.08 million, Indian commerce ministry data show.

However, global supply chain disruptions, together with increased tensions along the border with Pakistan and China have, in recent years, fast-tracked India’s efforts to make weapons at home or diversify its sources of supply.

This has led to an 11% drop in its total arms imports during 2017-2022, said the Stockholm International Peace Research Institute (Sipri) in a report last month. “Russia’s position as India’s main arms supplier is under pressure due to strong competition from other supplier states, increased Indian arms production,” the report stated.

India has, meanwhile, been increasingly manufacturing several critical components for foreign companies. In fiscal 2023, its own defence exports hit an all-time high of $1.6 billion.