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Keeping India-US Defence Ties on Even Keel despite CAATSA

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • June 14, 2018

    The Countering America’s Adversaries through Sanctions Act (CAATSA), passed by the US Congress in August 2017 has placed India in a bind. The Act, which came into effect in January 2018, provides for the imposition of sanctions on those who engage in any significant transactions with Russian entities identified by the US administration. The list of 39 proscribed entities notified in May 2018 under the provisions of the Act reads like a who’s who of the Russian defence industry, with several of which India has been dealing for decades. These dealings have come under a cloud now.

    While the medium and long term consequences of the Act1, even if all of them are not likely to materialise, have been commented upon, there has been little focus on the immediate fall out with respect to India’s ongoing contracts with Russian companies. The prospect of being sanctioned by the United States seems to have made Indian banks reluctant to remit amounts that are due, or open letters of credit, under the terms of such contracts.

    Contractual defaults are a serious matter, which could, among other things, affect the delivery schedule and frustrate the execution of contracts. It is a testimony to the pragmatism and maturity that characterises India-Russia ties that the payment imbroglio has not yet snow-balled into a major crisis.

    India and Russia may already be working on resolving this problem with or without the US involvement, but that is besides the point. What is inexplicable is that this wholly foreseeable situation could not be prevented over an eight-month period from the passage of the Act to the notification of the list of proscribed Russian entities.

    The issue is likely to figure in the ‘2+2’ talks between the Indian external affairs and defence ministers and their American counterparts when they meet in July 2018. That the matter has to wait till then points to the inadequacy of the dialogue mechanism set up under the US-India Defence Technology and Trade Initiative (DTTI) to address and settle pressing issues in real-time.

    There is a strong possibility of some modus vivendi being found in the forthcoming ‘2+2’ talks to let India honour its contractual commitments without facing the prospect of being sanctioned. The optics of Indian ministers virtually pleading for an exemption from sanctions under CAATSA could linger in the public and bureaucratic memory for a long time and condition the future trajectory of the India-US defence relationship.

    The ongoing muddle clearly indicates that the defence trade between India and US companies is susceptible to extraneous factors. It is no coincidence that at a time when US defence exports to India were picking up, the standard Force Majeure clause was amended by the Ministry of Defence in 2016 to the effect that the acts of the government or any state agency of the seller country which may affect the discharge of the seller’s obligation under the contract shall not be treated as Force Majeure. Hopefully, no need will arise to test the efficacy of this clause.

    Regardless of how the issue gets settled, it would be naive to dismiss offhand the notion that the way the situation is unfolding will not reinforce some of the old scepticism about over-reliance on import of arms. It is important to pick up the early signs, if there are any, of the insidious influence of this disruptive development on the politico-bureaucratic thinking in India and take effective steps to neutralise it. This requires recognition of what compromises each partner can make.

    What is the bottom line for India? With a large proportion of its inventory being of Russian origin, it is axiomatic that India can ill-afford to have ongoing contracts for supply of equipment, spares and other services stalled because of contractual default on its part. Nor will it serve India’s defence objectives to hold back any purchases from Russia till the Act remains in force or completely sever defence ties with Russia which, according to a media report, is perhaps what the US wants.2 The same report also makes a mention of the American concern that India may operate US equipment alongside Russian equipment. This cannot be a compelling reason why India must make a choice between US and Russian equipment, since this concern has not hampered the sale of defence equipment by the US to India so far. There is no reason why it should be of concern now, unless the issue is being raised to mount pressure on India to sign the Communications Compatibility and Security Agreement (COMCASA) and other agreements. If that indeed is the case, it may not work as India may not want to be seen to be succumbing to any pressure on this count.

    Many US lawmakers and top officials have been saying that India should be exempted from the sanctions mandated by CAATSA. While this is indeed welcome, the resolution to the present predicament should not be premised solely on the consideration that the imposition of sanctions on Indian entities would hurt US business interests in India or that it would impede the process of weaning India away from Russia. Mutual and shared interests must form the basis of an enduring solution to the present quandary, which requires recognition of the fact that new US partners like India – and indeed old NATO partners like Turkey which too is poised to go ahead with acquisition of the S-400 Triumf air defence system - need to maintain military relations with both the US and Russia.

    Respect for mutual interest also demands that India takes no precipitate action at the present juncture. Viewed in this perspective, it is hard to understand the purpose of seeking the approval of the Cabinet Committee on Security (CCS) at this juncture for the procurement of the S-400 Triumf air defence system. Even if the sanction were to be accorded, the deal will remain stuck as India will not be able to make even the advance payment as required under the contract without facing the prospect of being sanctioned by the United States. The move will thus achieve little except for being seen as an attempt to cock a snook at the United States.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.