India takes a hit over Russian fighters

BANGALORE - India's relations with Russia have hit an air pocket, with the Russians seeking to renegotiate the terms of a US$8.5 billion deal to supply India with Sukhoi fighter aircraft. The new pricing terms that the Russians are proposing would require India to fork out another half-billion dollars.

Under the deal to supply the multi-role combat aircraft to India, Russia's Irkutsk Corp has already supplied 60 Su-30s. Russia is willing to deliver another 40 fighters at the cost escalation of

2.55% per annum as agreed under the original deal. However, for the remaining 138 Su-30s to be assembled by the Bangalore-based Hindustan Aeronautics Ltd, Russia wants the cost-escalation rate to be hiked to a minimum of 5%.

India and Russia both need the deal, so a compromise is likely, such as settling for a cost-escalation rate of about 4%, above the current 2.55% but below the 5% now being demanded. Or India could pay in euros. But a bitter taste will remain.

Russia is also considering increasing the cost of the 44,570-tonne aircraft carrier Admiral Gorshkov (renamed by India as INS Vikramaditya) that it was to make available to India by August 2008. The proposed price rises were conveyed to a delegation of top Indian officials that was in Moscow last week.

This has injected a perceptible chill into India-Russia ties. Except for a few years following the collapse of the Soviet Union in 1990, when relations cooled, India's relationship with Moscow has been close. For decades, India has viewed Moscow as a reliable friend that backed its development priorities and provided its defense forces with most of its hardware. While trade and economic cooperation were important parts of the bilateral relationship, it was the military component that constituted the backbone of the friendship.

The friendship has survived despite India's warming relations with the United States in recent years. It is Russia that remains India's top military partner, notching up annual sales worth $1.5 billion, and it is with the Russians that Delhi's cooperation has more depth.

The multibillion-dollar Sukhoi program is said to be the largest in Indo-Russian military cooperation, which has contributed immensely to India's indigenization efforts. In another example, the BrahMos missile, which has been co-produced by India's Defense Research and Development Organization and Russia's NPO Mashinostroyenia, will be jointly exported by the end of this year.

The Indian Air Force loves its Sukhois for their domination of the skies. The Sukhois have replaced the Russian MiG-21s as the mainstay of India's fighter fleet. Four contracts have been signed since 1995 for the supply of Sukhois; the first provided for the purchase of eight Su-30K and 40 Su-30 MKI, the second of 10 Su-30 K, the third for licensed production of 140 Su-30 MKI, and the most recent in March for 40 Su-30 MKI.

What has irked India now is not only the hike in the cost of the fighters but also the suddenness with which the Russians raised the issue. As recently as March, the Russians had not indicated any problem with the cost-escalation rate of 2.55%, complain officials.

The Russians attribute the higher costs to the depreciation of the US dollar and the strengthening of the ruble, as well as double-digit inflation in Russia.

As for the Gorshkov, it seems that the aircraft carrier will arrive only around 2010 instead of next year. Refurbished at a cost of $1.5 billion, which includes 16 MiG 29K aircraft, the Gorshkov project is now going into a cost overrun of more than $113 million - and there were no provisions for this in the contract.

Last week, the Russians told the Indian delegation that the delivery of Gorshkov is being held up by a funds crunch at the Sevmash shipyard in northern Russia, where the carrier is being refurbished. They said the shipyard had grossly underestimated the length of cabling the carrier needed. The Russians told India that if it wants the carrier delivered on time, Delhi will have to cough up more. India is concerned with the delay as its other aircraft carrier, INS Viraat, is due for retirement soon.

Indian officials point out that much has changed in Russia's dealings with India. In the past, Moscow might have indulged India with "friendly prices" and allowed a foreign-exchange-strapped India to pay for purchases in rupees. But today things are different: Moscow wants to hike rates after contracts are finalized.
Yet Russia says little has changed in its approach to India. With regard to the cost escalation for the Sukhois, it says that as a special gesture to India, it will consider reducing the proposed rate of 5% to 4.5%. It has also said it will continue with the current 2.55% annual escalation rate if India is willing to pay with the more stable euro.

The Sukhoi and Gorshkov troubles come close on the heels of a spat over allowing each other's civilian aircraft into their airspace. When Russia decided to ban Air India and Jet Airways from its airspace this month, India hit back by barring Aeroflot and Transco. An open collision was avoided with the two sides agreeing to maintain the status quo of an earlier bilateral civil-aviation agreement.

Officials say that while India remains appreciative of the Russians for providing it with military equipment when the West had been reluctant to do so during the Cold War years, India nonetheless has had problems with Russian military supplies.

Indian military officials have been irritated for some time with the severe shortage of spare parts and the huge delays that dog delivery of Russian equipment. Delivery of the Sukhois, T-90S main battle tanks and Talwar-class stealth frigates have been delayed by years. It is not just with regard to supply of new acquisitions that the Russians are running late, but repair and overhaul of past acquisitions are also behind schedule, complain officials.

By Sudha Ramachandran
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