Would retaining Royal Sovereign stop Giulio Cesare's transfer?

Would Soviet retention of Royal Sovereign prevent Italy from transferring Giulio Cesare?

No. The two ships were governed by separate agreements, so withholding Royal Sovereign would not cancel Italy's reparations obligation.

Royal Sovereign's loan and Giulio Cesare's transfer rested on different agreements. The British battleship was covered by an Anglo-Soviet arrangement, while the Italian ship formed part of Italy's war reparations. A Soviet refusal to return the British ship would therefore not release Italy from its own obligation. Delaying a decision on Royal Sovereign until the Italian ship arrived is suggested as one possible Soviet tactic, although Giulio Cesare is still expected to transfer without it. The resulting Soviet force would require changes to Western building plans and deployments, while also giving the British and Italian navies a stronger argument for funding.