US sanctions effect: Indian banks’ reluctance to process payments worries Russia

Russia has expressed concern over Indian banks’ reluctance to process payments worth billions of dollars, citing US sanctions against Russia.

The Trump administration imposed in April the latest round of sanctions against Russia.

According to sources close to the development, Russian diplomats and bank representatives met top officials at the State Bank of India on Thursday to discuss a way out.

The impasse, if it continues, could impact annual transactions between the countries amounting to around $10 billion.

The sources, who spoke on conditions of anonymity, said SBI has historically been the lead bank for India-Russia transactions.

“Over the past few months, SBI and other PSBs have refused to process or have delayed processing payments to Russian companies and are refusing to honour bank guarantees and LCs from Russian banks towards Russian companies participating in government tenders,” the sources said.

While Russia’s Vneshexonombank is the lead bank for bilateral payments, some deals have been processed by other banks such as Sberbank, VTB bank and Gazprombank.

Queries sent by BusinessLine to the Russian banks and SBI did not elicit any response.

Defence contracts

The sources, however, said that receiving money relating to defence contracts and other payments, including for Russian diplomatic missions, have been difficult.

“Leave aside large defence contracts, even for small payments of a few thousand US dollars, the banks have started asking for supporting documents, including the full ownership structure of the company and its affiliates and sub-contractors,” the official noted.

As all these transactions are nominated in US dollars, Indian banks are reluctant to process them fearing loss of American and European businesses.

One of the options being discussed is to carry out settlements in rupee or rouble or a third currency such as the Hong Kong or Singapore dollar. In that case, the transactions would be carried out by a bank that has no exposure to the US market, just as UCO Bank was used to handle oil payments to Iran after the US imposed sanctions.

“Banks’ compliance departments are trying to play safe and are hence blocking all Russia-related transactions, even though the parties to the deals are not under US sanctions,” another person familiar with the matter said.

According to several sources, payments for defence contracts worth over $1 billion are stuck. “Considering the volume of the trade with Russia vis-a-vis that with the US, it is easier for some banks to give up the Russian business rather than invest time and resources in understanding these sanctions,” a banker, who did not wish to be identified, told BusinessLine .

However, he said that the trade between the countries will continue.

The issue was taken up by the leaders of the two nations in Sochi earlier this year and is likely to be discussed at upcoming meetings.

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