NEW DELHI (BLOOMBERG) - India and Russia have agreed on a new payment method through their national currencies for multi-billion-dollar defence deals, in a bid to avoid risks created by the US threat of sanctions and banking restrictions.

The arrangement would enable India to pay the first instalment soon for two warships that Russia is building for its navy, two people familiar with the matter said in New Delhi, without elaborating.

Defence contracts will be settled in roubles and rupees under a payment agreement reached by the central banks of Russia and India, said a person in Moscow with knowledge of the preparations.

While the new mechanism potentially opens the way for releasing billions of dollars in contract payments to Russia, it may still be dependent on India winning agreement from US President Donald Trump not to impose sanctions in retaliation.

Russia has faced an uphill struggle to maintain sales by its strategic defence sector, which totalled US$19 billion (S$25.76 billion) last year, partly because of US sanctions that threaten anyone who buys Russian weapons.

Even though the US has applied those only once so far - against China - the fear has cast a pall over Russia's export business.

The world's second-largest arms exporter after the US, Russia suffered a 17 per cent drop in foreign weapons deals from 2014 to 2018 amid declining purchases by India and Venezuela, according to the Stockholm International Peace Research Institute.

SEEKING WAIVER

An increasingly important US partner, India also has long-time strategic ties with Moscow dating back to the Soviet era in the Cold War.

Despite the decline in sales, Russia accounted for 58 per cent of the south Asian nation's arms imports from 2014 to 2018.

The US has been pushing New Delhi, unsuccessfully so far, to cancel a more than US$5 billion contract to buy Russian advanced S-400 air-defence missile systems, brandishing the threat of punitive measures.

Still, India is attempting to obtain a US presidential waiver for its arms purchases.

Turkey, a North Atlantic Treaty Organisation member state, is facing the threat of US sanctions over its S-400 purchase from Russia, which began delivery on Friday.

Delivery of the S-400 to India is planned to start after 2020 and "issues with payment have been resolved", the Russian Federal Service for Military-Technical Cooperation said last month, according to the state-run Tass news service.

Promsvyazbank PJSC, a government-controlled Russian lender that has been tasked with financing the defence industry to shield the two biggest state-owned banks Sberbank and VTB from the threat of US sanctions, is ready to play a role in the Indian transactions, the person in Moscow said.

India's S-400 deal signed in October is among agreements with Russia that are cumulatively worth US$10 billion.

They include joint production of Kamov Ka-226T helicopters worth US$1 billion, and four warships for the Indian Navy, with two of the vessels built in Russia and two at a shipyard in India under a technology-transfer agreement.

Indian Prime Minister Narendra Modi in March inaugurated a rifle plant in Amethi that will produce 750,000 Kalashnikov AK-203 rifles under a joint venture between India and Russia.

STOPPED PAYMENTS

After the US sanctioned Russian state arms exporter Rosoboronexport in late 2017, the State Bank of India stopped payments to Russia for Indian arms purchases, a person familiar with the matter said.

The 2017 Countering America's Adversaries Through Sanctions Act, called CAATSA, requires the imposition of sanctions on persons and entities that knowingly engaged in a significant transaction with Russia's defence or intelligence sectors.

The US State Department decides whether a transaction is significant under the legislation, while the 2019 National Defence Authorisation Act provides for a presidential waiver from sanctions.

Junior Foreign Minister Vellamvelly Muraleedharan on Wednesday told the Indian Parliament that the country's need for the S-400 had been "clearly conveyed" to the US during Secretary of State Mike Pompeo's visit in June.

The Bank of Russia didn't respond to a request for comment. The State Bank of India and Promsvyazbank didn't immediately respond to requests for comment. A spokesman for India's Ministry of Defence declined to comment.

VTB late last month denied an Indian media report that it would process Indian payments in euros for the arms purchases, avoiding use of the dollar.

"It was clear from the beginning that it wouldn't work either in euros because the global financial system is so dependent on the US that no one will dare to do this," said Mr Ruslan Pukhov, head of the Centre of Analysis of Strategies and Technologies, a defence industry consultant in Moscow.

"Russia is trying to resurrect practices we had in Soviet times by clearing in rupees and roubles," Mr Pukhov said.

A waiver from Mr Trump "is unlikely as it would set an unsustainable precedent", said Mr Scott Jones, whose US-based TradeSecure consultancy advises governments on arms export controls and sanctions.

"Buying military equipment from Rosoboronexport constitutes a sanctions violation, so whether they're transacting their business denominated in dollars or pesos or rupees, it doesn't change the scope of sanctions."