India, Russia cut deal on payment delays, defense production

This story was updated May 5, 2023, at 10:02 a.m. ET.

NEW DELHI — India and Russia have agreed to resolve delayed payments related to defense contracts, while also formalizing a plan for the local production of Russian equipment and spare parts.

The planned resolution comes as India and China are caught up in a territorial dispute near their borders, and as the West implements sanctions on Moscow amid Russia’s invasion of Ukraine.

As a result of the economic restrictions, India has been unable to make payments to Russia since April 2019. India has attempted to install an alternative rupee-ruble payment to cover the costs, but Russia declined the proposal. The amount due totals about $3 billion as of April 2023, a government source told Defense News on the condition of anonymity because the individual was not authorized to speak to the press.

Now, the two governments have achieved a breakthrough, according to sources with knowledge of the agreement, which was made April 28 during bilateral talks involving Indian Defence Minister Rajnath Singh and his Russian counterpart Sergei Shoigu.

Under the new plan, India’s Defence Ministry will make payments through Russia’s financial messaging system. The Financial Messaging System of the Bank of Russia, or SPFS, is an alternative to the Swift system, which supports international financial transfers; several governments have limited Russia’s ability to use Swift.

Indian banks designated by the government are to make pending payments for signed defense contracts between India and the Russian arms export agency Rosoboronexport. If the Russian ruble transactions are blocked, the trade settlement will instead involve Indian rupees.

Local production

Russia also agreed to support India’s defense industry through the economic initiative Make in India, according to a statement from the Indian Defence Ministry.

“The two Ministers discussed wide-ranging issues of bilateral defence cooperation, including military-to-military ties as well as industrial partnership,” the ministry said. “They also discussed the Russian defence industry’s participation in the ‘Make in India’ initiative and ways to provide further impetus to it.”

Russian Embassy spokesman Dimitry Solodov did not respond to multiple requests for comment.

However, sources — speaking to Defense News on the condition of anonymity because they were not authorized to speak to the press — said Russian original equipment manufacturers are to set up joint ventures with private defense enterprises in India to locally produce spare parts, systems and subassembly material, as well as to perform maintenance, repair, overhaul and upgrade work in order to keep Russian equipment operational for India’s military.

Under the plan, those Russian manufacturers “can retain up to 49% equity holding” in the private Indian businesses, a source noted.

“Under this initiative, Russian OEMs will also build weapons and military equipment in India with a minimum of 50%/60% indigenous content,” the source said.

The variation in percentage is due to differing requirements under the Make in India effort. The category “Buy and Make Indian” requires 50%, while “Buy Indian” requires 60% given the foreign designs involved.

Currently, India’s military inventory is made up of 60% of Russian-made systems, a government source said, adding that for the last three to four years, Russia has failed to supply almost 40% of the spare parts on order for India.

“I have no doubt that Indian companies, including a large number of our small-scale enterprises, can manufacture spares, assemblies and subassemblies,” Amit Cowshish, a former financial adviser at India’s MoD, told Defense News.

State-run defense entities that could seek joint ventures with Russian original equipment manufacturers include Armoured Vehicles Nigam Ltd.; Advanced Weapons and Equipment India Ltd.; Bharat Electronics Ltd.; Bharat Dynamics Ltd.; Bharat Heavy Electricals Ltd.; Hindustan Aeronautics Ltd.; India Optel Ltd.; and Munitions India Ltd.

Private defense firms include: Ananth Technologies; Bharat Forge; Indesys Equipments; MKU Ltd.; and PTC Industries.

Likewise, Russian manufacturers that could participate include: Uralvagonzavod; Tecmash; Bazalt; Tactical Missiles Corp.; NPO Mashinostroyenia; United Aircraft Corp.; Russian Helicopters; Oboronprom; Almaz-Antey; United Engine Corp.; United Shipbuilding Corp.; Zvezdochka Ship Repair Center; Admiralty Shipyards; Aerospace Equipment Corp.; and Urals Optical and Mechanical Plant.

Practical plans?

But Cowshish said he doubts this bilateral arrangement is feasible given the need for varying degrees of cooperation, which is unlikely to take place.

Alternatively, he explained, Indian companies could develop products with indigenous designs or in technical collaboration with countries that have both used Russian-origin equipment and have developed stronger technical capabilities than India.

Ruslan Pukhov, who leads the Moscow-based Centre for Analysis of Strategies and Technologies think tank, noted Russia has managed to continue limited supplies to India despite the lack of payments. But unless the latest payment plan works soon, Russian supplies to India may come to a halt, he told Defense News.

Furthermore, retired Indian Air Force squadron leader and independent Russian military affairs expert Viajinder Thakur said the Make in India deal may not work as expected.

“Russian OEMs likely don’t have the bandwidth to help India localize [the] manufacture of spares, as the Russian military-industrial complex, or MIC, is working on a war footing for its own requirements,” Thakur told Defense News. “But India may not need the help of Russian OEMs. Under the arrangement, Indian companies can obtain the specification and drawings from Russia to facilitate local manufacture. Indian MIC needs to similarly work on a war footing. There is no other solution.”

Thakur added there can be little doubt the flow of Russian spares to India will remain constrained as long as Moscow is at war.

“Also, Russia’s ability to supply spare parts as well as manufacturing capability is likely to be constrained by Western sanctions,” Thakur said. “Long term, India’s best option is to localize production of Russian equipment spares.”

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