Part 2. A Longstanding Friendship under Threat

The first part of this article has demonstrated that India and Russian enjoy a close military relationship. India makes use of Russian material in all the branches of its armed forces. The material used ranges from munition to vehicles and even more complex weapon systems such as naval vessels. Besides of-the-shelf weapons systems, Russia and India work together in research and development and joint ventures. Russia is India’s foremost partner in its attempts to increase its domestic armaments production capacity. The Russian-Indian military relationship is not only time-tested but also comprehensive. Having documented the extent of the Russian-Indian military cooperation this part will now examine the potential impact of the sanctions on this trade.

The first part of this article has demonstrated that India and Russian enjoy a close military relationship. India makes use of Russian material in all the branches of its armed forces. The material used ranges from munition to vehicles and even more complex weapon systems such as naval vessels. Besides of-the-shelf weapons systems, Russia and India work together in research and development and joint ventures. Russia is India’s foremost partner in its attempts to increase its domestic armaments production capacity. The Russian-Indian military relationship is not only time-tested but also comprehensive. Having documented the extent of the Russian-Indian military cooperation this part will now examine the potential impact of the sanctions on this trade.

CAATSA

The United States first enacted sanctions against Russia in December 2012 under the Magnitsky Act; these initially targeted 18 Russian individuals. The Western states significantly expanded sanctions against Russia after the Crimean Crisis and the subsequent War in Donbass. Later expansion took place after controversy erupted over the 2016 American Presidential Election and the poisoning of former spy Sergei Skripal. For the Russian-Indian arms trade, these two sets of sanctions are most important.

In August 2017, the United States Congress passed the Countering America's Adversaries Through Sanctions Act (CAATSA), which implemented sanctions against Iran, North Korea, and Russia. President Donald Trump signed it into law while simultaneously stating that he believed it to be “seriously flawed.” The act obliges the President to impose five or more sanctions of a total of 12 against those who engage “in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation.”

Not all these twelve predetermined possible sanctions are equally threatening to Russian-Indian trade. The two most threatening are the possible suspension of export licenses for munitions, dual-use and nuclear-related items; and the ban on American investment in equity/debt of the sanctioned person. Some other sanctions, which are of not much relevance to India, include a restriction on US Export-Import Bank assistance; prohibition on loans from international financial institutions; exclusion from participation in US government procurement; and visa restrictions on corporate officers of the sanctioned entities.

It must be noted that dealings with the sanctioned entity will not automatically lead to the impositions of sanctions under CAATSA. The key determinant for imposing sanctions is “a significant transaction” between the named Russian entity and an outside agency. The determination of what is a significant transaction is not based purely on the monetary value. The State Department has stated that: “The factors considered in the determination may include, but are not limited to, the significance of the transaction to US national security and foreign policy interests, in particular, whether it has a significant adverse impact on such interests; the nature and magnitude of the transactions; and the relation and significance of the transaction to the defense or intelligence sector of the Russian government.” So far, however, no country has been sanctioned for dealing with the Russian arms industry. For the time being CAATSA seems a potentially powerful tool, albeit one that has not yet been used to its full extent.

Secondary sanctions

After a period of inactivity, the Trump administration launched new sanctions in April 2018. They targeted seven Russian oligarchs, twelve businesses, and seventeen government officials. Their assets have been frozen and doing business with them forbidden. It further broadened the sanctions already in place. Section 228 of CAATSA requires the president to impose sanctions on any “foreign person” that “knowingly,” “materially violates, attempts to violate, conspires to violate, or causes a violation of” any US sanctions on Russia. This effectually extended the sanctions that were already in place against Russian arms producers since the enactment of CAATSA from US entities to the world. The Office of Foreign Assets Control’s (OFAC) Economic Sanctions Enforcement Guidelines further stated that OFAC will “give substantial weight” to any transactions that cause “harm to sanctions program objectives.” This includes transactions that benefit the sanction’s target or have implications for US policy objectives. Section 228 further requires the imposition of sanctions on a “foreign person” that “facilitates a significant transaction, including deceptive or structured transactions, for or on behalf of” any person subject to U.S. sanctions. OFAC clarified that the sanctioned persons covered by this provision include both sanctioned entities, and any entity owned 50% or more by sanctioned entities. Here ‘facilitating’ does not merely refer to financial services but also to “providing assistance for a transaction from which the person in question derives a particular benefit of any kind” which could also include brokering or transportation. This means that companies involved with entities that are potentially linked to Russia should screen their activities to avoid falling afoul of this provision. The secondary sanctions are thus especially impactful as they also sanction non-US persons or organizations who engage in transactions with the sanctioned persons or in sanctioned activities even if the transactions do not involve US persons, US origin items, or US dollar payments. This means that the sanctions cover any transactions, even if there is no US jurisdictional nexus.

Altogether the sanctions apply to almost the entire Russian military-industrial complex and its top managers. They target the state-owned company Rosoboronexport, which since 2007 is the only Russian entity to hold a full license to export arms and military equipment. Other major Russian arms companies sanctioned include Almaz-Antey, Sukhoi Aviation, Russian Aircraft Corporation MiG and United Shipbuilding Corporation. These companies have thus been placed on the US Specially Designated Nationals and Blocked Persons List (SDN).

Especially the secondary sanctions pose a severe risk to the Russo-Indian arms trade. CAATSA imposes restrictions on banks that carry out operations with individuals and legal entities that are under sanctions. By Indian law, all foreign vendors of defense equipment need to furnish guarantees from designated Indian banks before bidding for any project. The Indian baking sector is very internationally active and enjoys strong links with American banks. Sanctions against them could force them into bankruptcy. As an official said: “No Indian bank can deal with any entity on the SDN list, as this will get them into major trouble with the U.S. As international transactions involve trade in dollars, no bank can afford to be noncompliant with the sanctions list.” As being cut off from the US-dollar dominated capital markets is a major threat the State Bank of India put an immediate stop to all payments from April 7 causing almost the entire Russo-Indian arms trade to come to a grinding halt. Other Indian banks have also been forced to freeze their lines of credit to Russian arms companies. So far, the frozen assets total $100 million, yet this number could rise to $2 billion in the coming months if the issue is not resolved. This can already lead to delays in the delivery of weapons under the existent contracts.

For now, it remains unclear how strict the Americans will be. However, having seen the vast size of the Russian-Indian military cooperation, it becomes apparent that the impact of the American sanctions could be very significant indeed.

Impact on outstanding orders

In their current form, the sanctions cover the entire Russian military-industrial complex and its top managers. This would leave no room for New Delhi to pursue defense cooperation with Moscow. If CAATSA were to be implemented in its strictest form India’s planned procurement from Russia would come under immediate US scrutiny. Unless India wants to brave the American punitive measures, this will put an immediate end to all outstanding orders. The further delivery of the KA-226T helicopters will not be possible. The purchase of S-400 air defense systems, produced by the sanctioned company Almaz-Antev will not be possible either. Especially this last deal would be the likely victim of sanctions as it attracts much attention in Washington. As it concerns the acquisition of a high-profile, complex weapon system which was not finalized before the sanctions rather than maintenance of existing Russian weapons this presents a clear violation of the sanctions. It is therefore precisely the kind of deals CAATSA was supposed to prevent. If the deal is signed regardless of the sanctions, politicians in Washington might wonder whether the sanctions are effective.

Impact on joint ventures and licensed manufacturing

CAATSA is likely to affect all the joint ventures, existing or planned, between Indian and Russian defense companies. This includes BrahMos Aerospace, the producer of the homonymous cruise missiles. This would end production and possibly cause conflict with Moscow over the ownership of the remaining munition stockpile. It could have further international implications because if the joint venture collapses India might no longer consider itself bound by its previous agreement to seek Russia’s approval for exporting the Brahmos. Joint ventures which are owned for less than 50% by sanctioned Russian entities would be free from sanctions if they can go without any transactions with the Russian industrial-military complex. Whether they could for a prolonged time is doubtful as most still rely on technology and assistance from Russia.

The cooperation on the Admiral Grigorovich class frigates would also come under threat. Two of these frigates would be purchased, and two would be built in India with Russian support. The company involved, United Shipbuilding Corporation (USC), is on the SDN list. Locally producing the frigates is already a complex project. If the sanctions are implemented in their strictest form, both the local production and the delivery of the already finished frigates will come to a standstill.

If India did withdraw from the development of the Sukhoi/HAL FGFA the American sanctions might have played a role in that as well. Under the threat of such sanctions, the continuation of such a significant joint venture would seem extra risky.

Impact on maintenance of existing equipment

Finally, the Act will also affect India’s purchase of spare parts, components, raw materials and other assistance for which Indian entities are dependent on Russia for domestic license manufacturing and maintenance of existing equipment. The Indian Armed Forces maintain an extensive stock of Russian material. For much of this equipment, India depends on Russia for its maintenance.

Regarding the MiG-29K/KUB ship-based fighters an Indian Ministry of Defense official has stated that they “are fully dependent on Russia for all major support issues” as many spare parts come from Russia. The same applies to the maintenance of the Mi-17V-5 helicopters.

The Russian Su-30 fighters have a total service life of 6,000 flying hours or 30-40 years within which they require three complete overhauls. India owns 272 Su-30’s which amounts to 816 overhauls. As these overhauls take place in Russia strict enforcement of the sanctions would put an end to the maintenance of these machines. They form the backbone of the Indian Airforce, so this would have significant security implications.

The Vikramaditya aircraft carrier was maintained by the Russians until 2015 as part of its warranty. A new maintenance contract was signed afterward. A crew group of Russian specialists remained permanently stationed in India for this purpose. With Russian support, coastal infrastructure for the repair of the carrier has been built in India. Whether India would be able to keep the vessel operational if it had to cut ties with Russia is doubtful.

India also leans on Russia for help with safety investigations and repairs after accidents. When an Indian Air Force Su-30MKI crashed in 2014, a team of Russian experts came to evaluate the fleet. When the INS Chakra had suffered damage to its sonar dome, a Russian team visited India for a joint investigation. Russia repaired the damage at the cost of $20 million. Due to the sanctions, however, a payment of $15 million has now been frozen.

This article has demonstrated that strict enforcement of the sanctions would have a significant impact on the Russian-Indian arms trade. It will cancel the pending purchases and shut down the joint ventures in which many billion dollars have been invested. While for Russia the negative economic impact will be severe for India there will be consequences for its national security as well. Primarily because of its dependence on Russia for maintenance of its existing stockpile a complete end to military relations will quickly have significant repercussions.

Assessing the threat of sanctions

Which road the US will take concerning India's military ties with Russia will soon become apparent. As the purchase of five S-400 Triumf systems for $6 billion will be the first significant transaction since the implementation of the sanctions the Trump administration will have to choose to either punish India for violating the sanctions or granting an exemption. This acquisition is especially problematic for the US as it concerns not just an agreement to service India’s stock of Russian-made weaponry but rather a new and state-of-the-art weapon system. How the US respond will have further implications as Turkey, a NATO ally, also plans to acquire S-400 systems. Despite US pressure Ankara seems unwilling to back out.

So far, the US has used strong terms to indicate that India will have to abide by the sanctions. The U.S. principal deputy assistant secretary of state for political-military said that U.S. allies should consider the law, under which any significant purchase of military equipment from Moscow would attract American sanctions. Tina Kaidanow said: “CAATSA is a feature, and we need to take it seriously. The [Trump] administration is always bound by U.S. law. This is a U.S. law. I’m hoping that not just India, but all of the partners that we engage with will understand that we will have to evaluate any potential large defense purchase from Russia seriously because that’s what the law demands of us.”

William Thornberry, the Chairman of the US House Armed Services Committee, has spoken specifically on the S-400 deal. He stated that the purchase would “threaten our ability to work interoperably in the future.” According to Thornberry, India’s acquisition of Russian S-400 systems could cost it access to sophisticated US military equipment, such as Predator drones, and American investment. This sword cuts both ways however as American companies would lose significant business opportunities.

It has been speculated that U.S. sanctions against the Russian military-industrial complex are, at least partially, meant to reduce the share of Russia in global arms sales. This would allow American companies to seize a larger market share. However, this is debatable. U.S. weapons exports go mostly to its NATO allies and partners like Saudi Arabia and South Korea. Russia also exports mostly to traditional partners such as China, Vietnam, and Venezuela. Therefore, in most of the weapons market, the U.S. and Russia are not direct competitors. India is, however, one of the exceptions to that as both countries have signed significant arms deals with the country. Pushing Russia out of the market could thus be an extra motive for U.S. lawmakers to pursue a strict stance towards India.

Dissident voices have however risen in the Trump administration. Defense Secretary James Mattis has suggested to exempt US partners from CAATSA. Calling for “national security exceptions” in the long-term interest of the US, Mattis specifically mentioned India and Vietnam who must buy weapons from Russia, to maintain their existent stockpile of Russian armaments. According to Mattis, the U.S. would be penalizing itself if it sanctioned U.S. partners who also buy U.S.-made weapons. He further said: "There are nations in the world who are trying to turn away from formerly Russian-sourced weapons and systems." Although weapons imports from Russia to India have been decreasing the new S-400 deal makes it questionable whether Mattis’s statements can apply to India. Mattis’s request for national security waivers received support from U.S. Secretary of State Mike Pompeo. He asked the Senate Foreign Relations Committee: “Will you make a commitment that you’ll help Secretary Mattis get the waivers that he needs in order to make sure that these sanctions don’t hit folks that were not intended to be harmed by these sanctions?”

The Trump administration is reluctant to penalize India because that would go against the U.S.’s long-term attempts to improve its relations with India. A closer relationship would help the U.S. check the rise of China, a country with which India has been feuding in the past and recently. Stronger relations give India a powerful ally which India needs as it has continuing border conflicts with its two nuclear-armed neighbors China and Pakistan. This new friendship was built on arms sales. A decade and a half ago Washington’s military sales to India stood at nearly zero. Today they amount to $15 billion, making the U.S. the second arms supplier after Moscow, while the Russian share in India’s arms imports has decreased by 11 percent over the last five years. America has been especially successful in areas in which Russia is not as competitive such as medium and heavy transport planes, airborne anti-submarine systems, and Chinook transport and Apache attack helicopters. This stronger military relationship culminated in the decision by Lockheed Martin to move the global production of F-16s exclusively to India. Together with the facilitation of India’s rehabilitation as a nuclear power, this has led to a significant strengthening of the US-Indian relationship. A strict application of the sanctions would undo much of what was achieved over the last decade and a half.

The administration’s calls fell on deaf ears despite that. Ranking member of the Senate Foreign Relations Committee senator Robert Menendez replied to Pompeo’s request by saying: “I also have to say, if we’re going to allow countries that are sanctioned […] to get off the hook because there’s some other benefit, well then we begin to erode the sanction policies, and we pick and choose. And other countries will seek the same questions.” Menendez has further increased the pressure on the administration, by requesting a rare multiagency investigation into the delays in the CAATSA's application, together with Republicans.

The Senate version of the National Defense Authorization Act (NDAA) for 2019 passed in June 2018 without a waiver provision. The version passed by the House of Representatives did allow for waivers for 180 days, provided the administration certify that the country in question is substantially reducing its transactions with Russia. However, this is not enough for India which has not shown an intention to scale back purchases from Russia. It might be that in the run-up to the November 2018 midterm elections US lawmakers are afraid of seeming ‘soft on Russia.’

It seemed that at least until the end of 2019 India would not be exempt from CAATSA. However, recently Indian diplomatic efforts and lobbying on Capitol Hill by Pompeo have paid off. The Conference Committee of the House and Senate has agreed on the final version of the annual defense policy bill which amends CAATSA. It adds a waiver for India, Indonesia, and Vietnam conditionally upon them reducing their dependence on Russia and increasing cooperation with the U.S. India could make a case that it fulfills both conditions thus escaping the sanctions. The U.S. Congress might, however, still object against the S-400 deal on the grounds set out by William Thornberry. Senator Menendez’s statement that buying S-400s was not weaning oneself off Russian material is indicative of the strong anti-Russian sentiment on Capitol Hill. So, although the chances of it have diminished significantly a conflict between the U.S. and India over Russian arms is still not entirely averted.

The Indian response

In May 2017, the Indian government moved to counter the impact CAATSA would have on Indian banks. They exempted existing weapon deals with Russia from the requirement on Indian banks to guarantee funds. However, when the sanctions were expanded in April 2018 to include all major Russian arms firms the Indian government did not manage to implement mechanisms to shield its banks from punitive measures in time. This lead to the freezing of lines of credit discussed above. The Indian government has since conducted talks with the American government to confer its concerns regarding the sanctions. It also has at all levels shown commitment to its relationship with Russia and unwillingness to give in to the American pressure.

Indian Defense Minister Nirmala Sitharaman has stated that the procurements of S-400 will go ahead despite sanctions. She said: “In all our engagements with the U.S., we have clearly explained how India and Russia’s defense cooperation has been going on for a long time and that it is a time-tested relationship.” Sitharaman added: “We have mentioned that CAATSA cannot impact the India-Russia defense cooperation.”

The Indian Ambassador to Russia, meanwhile, has pushed back on reports that sanctions will prevent the contract on Admiral Grigorovich class frigates from being completed. Ambassador Pankaj Saran said, "We do not believe in unilateral sanctions. We have the longest trip of cooperation with Russia, and we will continue to cooperate with Russia, and we will continue to implement all the agreements that we have signed with Russia."

Conclusion

A harsh response would go in against the recent attempts of the US to cultivate a stronger relationship with India. Simultaneously the American-Indian arms trade has grown, facilitating the movement of the F-16 production to India. All this could be lost if the U.S. applies CAATSA strictly, however, the most recent developments do not point in the direction of a strict application. Nonetheless, with the strong bipartisan support for a tough stance on Russia in the U.S., and an unpredictable administration this could still happen. This article has shown the significant degree to which India depends on Russia to maintain its combat readiness. As India seems unwilling to buckle to American pressure, this could lead to a confrontation. This confrontation will revolve around the S-400 deal which represents a prime example of the transactions CAATSA was designed to stop. Putin and Modi plan to officially sign the contract during their high-profile meeting in October 2018. This is in the run-up to the mid-term elections in the U.S. so political pressure on all parties will be high. A confrontation between the U.S. and India looms if India is not granted a waiver. The consequences of that could be far-stretching and significantly impact the relations between the U.S., Russia, and India and thus alter the political situation in Eurasia.