India asks US to allow release of funds frozen over suspected Russia diamond link: Report

India has asked the US to allow the release of $26 million belonging to at least two Indian diamond firms that was frozen due to their alleged trade links with sanctioned Russian diamond major Alrosa, three Indian sources told Reuters.

The funds were frozen earlier this year due to US sanctions on Alrosa that were imposed in April 2022 by the US Treasury's Office of Foreign Assets Control, two of the sources said. Both the sources are Indian government officials, who declined to identify themselves or the companies, citing the sensitivity of the matter.

The freeze is the first known punitive sanctions measure against any Indian business since Russia's full-scale invasion of Ukraine last year and subsequent Western sanctions on Russian entities.

The diamond traders' funds were frozen when United Arab Emirates-based units of the unspecified Indian companies tried to transfer them to buy rough diamonds, one government source and one industry source said.

One of the sources said that banks halted the dollar transaction.

Reuters could not determine if the money was being transferred to Alrosa or another party.

"The government is aware of the OFAC action and has initiated dialogue over it," one of the Indian government sources said, without identifying the US counterparty. "The problem was suspicion of trade links with Alrosa."

The Indian firms impacted by the action have told the government the payments were meant either for non-sanctioned Russian entities or for orders completed before the sanctions on Alrosa came into effect, the source said.

"OFAC itself does not freeze or block transactions," a US Treasury spokesperson said. "US persons are required to block or reject transactions in accordance with the relevant sanctions program."

Foreign banks or other entities running afoul of OFAC sanctions risk being cut off from the dollar-based financial system, but the Treasury does allow entities to apply for general or specific licenses to complete some transactions.

State-controlled Alrosa, the world's largest producer of rough diamonds, did not respond to an email seeking comment. India's trade and foreign ministries did not respond to requests for comment.

India has the world's largest diamond processing capacity and exported polished diamonds worth more than $22 billion last fiscal year that ended on March 31. The industry, based mainly in the western state of Gujarat, buys rough diamonds from suppliers in countries such as the United Arab Emirates, Belgium and Russia.

Alrosa has managed to maintain steady diamond sales despite the U.S. sanctions, which were not followed by the European Union. Some G7 countries have called for tighter sanctions on Russia's diamond trade.