Russia’s currency deal with India & China: Holds potential to challenge CAATSA

Russia’s currency deal with India & China: Holds potential to challenge CAATSA

South Asian nations and influence over it has been directly or indirectly the apple of discord between the global powers, especially between the US and Russia. Because of augmenting geostrategic importance of India and China, diplomatic relationship with these countries forms the centre stage of both Russia and the US foreign policies. One of the chief concerns of relationship with India and China is governed by defence ties and defence trades.

Despite facing the threats of potential sanctions from the US, New Delhi and Beijing have never shied away from manuring its defence and trade ties with Russia, that in a way aid the countries to maintain a level of autonomy from the US monopoly. In the pool of augmenting pressures from the US, even the gravity of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which was signed into US law in August 2017, has not subsided the move of India and China to manure their defence trade ties with Russia.

The aim of the CAATSA is to discourage countries worldwide to engage in defence relationship with Russia. Additional US law enacted in 2018, provides an opportunity to chief US security partners to mend the ties and escape the CAATSA through potential waiver if they procure to reduce their defence deals with Russia. The US integrated the CAATSA into its legal framework as a response to Russia’s annexation of Crimea in 2014 as well as its alleged interference in the 2016 US Presidential election.

Despite the threat of CAATSA, India and China have indicated a continuing willingness to procure materiel from Russia and the recent move of signing complex deals with Russia’s VTB Bank and its counterparts from both the countries that in all possible ways will facilitate defence trade between Moscow and New Delhi, and Moscow and Beijing, highlights the same.

Both China and India are important defence trade partners of Moscow, and the contracted deal will enable payments for defence equipment to proceed in local currencies of these nations, ditching requirements for the US dollars and also the need to support such contracts through traditional letters of credit. Under the deal, the VTB bank of Russia and the Merchant Bank of China will facilitate payment made in ruble and yuan, the currencies of Russia and China respectively, between the two countries through mutual settlements from 2020. The payment method also includes the application of “gateways” to circumvent the international Society for Worldwide Interbank Financial Telecommunication (SWIFT) banking messaging system. The payment method will enable Russia to sustain high levels of international military sales.

Russia is an important defence trade partner of China, as with defence acquisitions from Russia worth between USD1.5 billion and USD2 billion a year owning to China’s purchase of the “S-400E Triumf” system and “Sukhoi Su-35” fighter aircraft from Russia, in the near future is to witness an upward hike. The purchase attracted China the first-ever imposition of CAATSA in September 2018, by the US that resulted in a prohibition on foreign exchange transactions under the US jurisdiction, a prohibition on transactions with the US financial system as well as a denial of export licences. The sanctions have nor curbed China’s intent of procuring addition “Su-35s” or the “Sukhoi Su-57” from Russia to augment its defence calibre.

The move of engaging in a financial transaction in the national currencies for arms delivery has strengthened ties between New Delhi and Moscow as well, as the deal will enable central banks of both the nations to transact in ruble and rupee as well as other currencies like euro, thus escaping mandatory payment in US dollars. The agreement signed between India and Russia is not first of its kind as examples of such deals do surfaces in the history of diplomatic ties between the countries as early in the 1960s and 1970s.

In September 2018, a payment equivalent to about USD40 million was transferred in the two currencies as payment for the mid-life upgrade of one Indian Navy ‘Kilo’-class submarine. In October 2018, the Russian export agency, ‘Rosoboronexport’ entered into a deal with the public-sector Syndicate Bank in New Delhi, under which the Indian bank was to pay Russia’s Sberbank in rupees and rubles with direct bank transfers for purchases.

Russia has been a very important strategic partner of India in the arena of defence trade, and New Delhi recently has entered into several defence deals with Moscow to cement the tie between the countries. India has been engaged in a negotiation of a deal to procure defence equipment from Russia worth about USD20 billion, including a USD5.5 billion deal signed in November 2018 to procure five Almaz-Antey “S-400E Triumf” self-propelled surface-to-air missile systems and a USD3 billion contract signed in March 2019 to lease another Project 971 ‘Akula’-class nuclear-powered attack submarine.

The deals raise the suspicion of bittering the US- India defence ties as well because the purchase of “S-400” from Russia holds potential of bringing India under the CAATSA sanctions, thus augmenting the probability of forcing India as well to breathe the heavy air of coercion by throwing the positive defence relationship of India and the US on bumpy roads.