People familiar with the development told ET that the Russian side has suggested a permanent solution to the issue by setting up an alternate bank just for military transactions

by Manu Pubby

New Delhi: The US may not for the moment impose sanctions on India under the controversial Countering America’s Adversaries Through Sanctions Act (CAATSA) for inking the S-400 deal, but the manufacturer of the missile system, Almaz Antey, has been in Washington’s crosshairs for long.

After India announced the deal, the US said CAATSA was not intended to damage partners, but it was non-committal on a waiver. Almaz Antey – Russia’s prime manufacturer of air defence systems – has been a top target for the US administration, and figures on an older sanctions list that restrict financial institutions from dealing with it.

The Indian position has been that the S-400 talks with Russia were initiated much before the CAATSA sanctions were announced and that the deal has been done in national interest.

However, o n September 21, the US had sanctioned Chinese military equipment development department under CAATSA for S-400 purchase by Beijing. This contract, too, was signed before the sanctions act was passed, but the penalty has apparently been levied because the actual delivery and payments have taken place this year.

For India, dealing with Almaz Antey poses a big challenge primarily on the payments front. No Indian bank is willing to be used as the payment channel for the transaction, even if assurances that CAATSA won’t be used are given. CAATSA authorises the US to suspend export licenses on dual use items, a ban on investments by US entities, prohibition of loans from international institutions and visa restrictions.

Also, Almaz Antey figures on the late 2016 `Specially Designated Nationals’ (SDN) sanctions, which forbid financial transactions with it. To move $5.43 billion to Russia, the banking channel will not be in a position to transfer without the risk of getting on the banned list. “As international transactions involved trade in dollars, no bank can afford to be non-compliant to the sanctions list,” an official had told ET.

The problem also lies with the Russian side as its main banks too have refused to be used for making these transactions.

All these banks risk getting isolated from the world trade for processing any payments for the S-400 deal. A solution has been in the works for the past several months that involve using India’s Syndicate Bank, but the issue has not been fully resolved.

People familiar with the development told ET that the Russian side has suggested a permanent solution to the issue by setting up an alternate bank just for military transactions. The matter has been discussed at senior levels but little headway seems to have been made, the sources said.

Even before CAATSA, payments worth several billions of dollars to Russia for ongoing contracts have been stuck over the past two years due to the SDN sanctions. They include payments for life extension programmes for Russian Kilo class submarines, money to be sent to Moscow to repair the Chakra nuclear attack submarine that met with an accident, and ongoing spares and parts contracts.