Oil trade between India and Russia: what is at stake?
To protect the economy from the negative impact of the recent rise in the price of crude oil, India is exploring the possibility of importing additional oil at discounted rates from Russia, which faces sanctions and global backlash from the conflict in Ukraine.
According to data and analytics firm Kpler, Indian crude oil imports from Russia in March this year are nearly four times higher than in the same period last year.
India’s crude oil imports from Russia averaged nearly 360,000 barrels per day in the first half of this month. According to current shipping schedules, the average oil trade between the two countries is about 203,000 barrels per day.
“Already pledged oil shipments from Russia that cannot find buyers in Europe are being bought by India,” the Financial Times was quoted as saying Alex Booth, head of research at Kpler.
“Exports to India rose in March before there was an official announcement by New Delhi,” Booth said.
There is no government to government (G2G) regime for oil trade between India and Russia. Indian Oil Corporation has done most of the crude oil purchases from Russia for India.
While the United States has acknowledged that India’s purchase of crude oil would not violate US sanctions, it has warned that it would put India on the wrong side of history.
The US is putting increasing pressure on India to distance itself from Russia.
White House press secretary Jen Psaki said in Washington on Friday that the United States is in contact with Indian leaders at various levels over the issue of India’s decision to buy oil from Russia at discounted rates.
“We will project and convey to every leader around the world that the rest of the world is watching, where you stand, regarding this conflict, (and) whether it is support for Russia in whatever form they are falling illegally Ukraine,” Psaki said.
India has so far taken a neutral stance in the conflict between Russia and Ukraine. It is one of the few countries that has not condemned Russia’s invasion of Ukraine. India also abstained on a US-backed UN Security Council resolution deploring Russia’s aggression against Ukraine.
India’s decision to expand crude oil trade and economic relations with Russia would have significant diplomatic and economic consequences.
It is important to note that India relies heavily on imports to meet its oil needs. Nearly 85 percent of the country’s average daily crude oil needs of about 5 million barrels are met by imports.
The rise in the oil price put enormous pressure on the Indian economy. High crude oil prices pose inflationary, fiscal and external sector risks. India’s fiscal calculations for fiscal year 2022-23 are made with an assumption of crude oil prices of $70 to $75 per barrel.
As a result of the conflict between Russia and Ukraine, the price of crude oil has risen. It rose to nearly $140 a barrel earlier this month.
India, which is a major importer, must continue to look for competitive prices. A hefty discount offered by Russia is an opportunity. It is essential from the perspective of the Indian economy.
Commenting on the oil trade between India and Russia, Foreign Ministry spokesman Arindam Bagchi said India, as a major oil importer, is looking at all options at all times. “India imports most of its oil needs, it is filled by imports. So we are always exploring all possibilities in the global energy markets because of the situation we face when importing our oil needs,” said Mr Bagchi.
Russia is the second largest exporter of crude oil after Saudi Arabia. Nearly three quarters of Russian crude oil exports go to the OECD member countries.
Central European countries such as Germany, France and Italy, also members of the North Atlantic Treaty Organization (NATO), are heavily dependent on Russia’s oil supplies. If NATO member states continue to import Russian oil for economic reasons, India must also prioritize its economic interests.
A major challenge in the oil trade between India and Russia is the payment system. According to sources, the two countries have been investigating setting up a rupee-rouble trading mechanism for paying for oil and other goods.
In addition to the payment mechanism, a number of other matters still need to be worked out. It includes insurance and freight.
In times of military conflict, insurance costs rise significantly. India’s oil imports from Russia are traditionally low due to high freight costs.
The Union’s Minister of Petroleum and Natural Gas, Hardeep Singh Puri, recently said that the Indian government was evaluating Russia’s supply of crude oil imports at discounted rates in the Rajya Sabha.
“Talks are currently underway. Several issues need to be discussed, such as how much oil is available in Russia or in new markets or with new suppliers that may enter the market. There are also issues related to insurance, freight, and many other matters, including payment arrangements,” the minister had said.
Russia has been one of India’s closest and most trusted allies. It is by far the largest arms supplier to India. According to data available from the Ministry of Foreign Affairs, Russian investment in India is $18 billion while Indian investment in Russia is $13 billion.
The trade balance is in favor of Russia. India’s imports from Russia were $7.75 billion, while India’s exports to Russia were $3.22 billion in 2018.
Despite the threat of US sanctions, Prime Minister Narendra Modi’s government struck a $5.43 billion deal with Russia in 2018 to buy the S-400 defense system. Delivery of the missile system began in 2021.
However, India needs to make a cautious move. The United States and other Western allies are also critical.
