Crude reality: Why has India ramped up imports of Russian oil?
India’s oil trade with Russia has undergone a seismic shift in the last one and a half years, spurred by the Ukraine conflict. With India’s refiners capitalizing on discounted Russian oil, Moscow swiftly became India’s primary crude source, claiming 40% of imports as OPEC’s share dwindled. Since April 2022, India’s Russian oil imports have soared more than tenfold, surging significantly after the G7 imposed a $60-per-barrel cap on seaborne Russian crude.
As India, the world’s fastest-growing major economy, ramped up purchases, it saved approximately $5 billion, accounting for 20% of annual crude imports compared to a mere 2% in 2021. This surge boosted bilateral trade with Russia to $50 billion in 2023, bolstering Indian energy security substantially.
In 2023, Russia dominated the Indian energy market as the primary crude supplier, contributing over 35% of total oil imports, leveraging substantial Moscow discounts amid Western sanctions. However, there was a significant import drop in December to 1.48 million barrels per day (bpd), down from a peak of 2.15 million bpd.
Reports have recently surfaced in Indian media suggesting potential payment issues between New Delhi and Moscow, with India registering zero imports of Sokol grade, which is produced in Russia’s Far East region, in December – for the first time in the past 13 months. As sanctions against Moscow continued to expand, the government-owned Indian Oil Corporation (IOC) reportedly ran into problems with payment for Sokol grade which was already on its way to India. As a result, six containers carrying oil idled close to Indian waters for weeks, unable to discharge the oil at their destination ports – Vadinar and Paradip. Some of these tankers may have been rerouted to China.
In an additional technical complication arising from sanctions, another Indian state-owned company, Oil and Natural Gas Corp (ONGC), which holds a 20% stake in Russia’s Sakhalin-1 project, faced problems with receiving dividends, resulting in reduced profits. ONGC had earlier sold its share of oil from the project in the international markets, but this changed after Russia formed a new company to operate the Sakhalin-1 field.
Even then, according to the latest assessment by S&P Global Commodity Insights, India’s demand for Russian crude remains resilient despite slowdowns in imports and the situation in the Red Sea. Russian oil imports are expected to stay robust, potentially accounting for 35-45% of India’s total crude imports, the analysts say.
Indian-Russian oil trade has run into a number of challenges thus far. Firstly, the payment mechanism remains a concern for both sides. New Delhi has encountered significant obstacles in settling payments for oil imports with Moscow after Russia was disconnected from the SWIFT international payment system due to Western sanctions.
The rupee-ruble mechanism adopted by the countries faltered due to sanctions and the depreciation of the ruble, complicating crude trade.
Issues with UAE dirham payments arose from Russian exporters’ UAE banking challenges. In pursuit of seamless oil trade, both Moscow and New Delhi aspired to eliminate the use of the US dollar to shield themselves from Western sanctions. In contrast, the UAE maintained a neutral stance and refrained from imposing sanctions on Russia. Meanwhile, Indian refiners diversified transactions, settling some Russian oil payments in Chinese yuan.
Transporting and insuring oil shipments from Russia to India also poses a challenge, as shipping firms and insurers fear sanctions violations or legal entanglements. India’s dependence on Russian vessels raised freight and insurance expenses, slashing oil discounts from Russia to $4/barrel from a peak of $30/barrel in the middle of last year.
However, when India’s minister of petroleum and natural gas, Hardeep Singh Puri, delved into the nuances of India’s imports of Russian crude in December, he clarified that the recent import dip stemmed from unfavorable pricing, not payment woes, saying, “There is no payment problem. It is a pure function of the price at which our refiners will buy it.”
Nevertheless, India’s growing oil trade with Russia is a diplomatic puzzle as it could impact its ties with nations such as the US and its allies, which urge India to condemn Russia’s actions in Ukraine. India has so far maintained neutrality, abstained from UN resolutions, and preserved its strategic autonomy and historical ties with Russia.
Balancing its interests with the US, a key ally and major source of defense, trade, and technology cooperation, India has effectively managed its oil trade with Russia without compromising its national security and sovereignty, or alienating other partners. India’s ability to balance these interests is the key factor impacting this area of cooperation between the two countries.
Commenting on the oil trade with Russia, Hardeep Singh Puri stressed India’s right to affordable energy and highlighted the economic advantages of increased imports of crude. Expanding oil imports from Russia has averted a potential spike in global crude prices, liberating Gulf oil for other nations’ consumption.
Going forward, the oil trade between India and Russia will depend on overcoming these challenges, as well as how the global oil market evolves, given the ongoing geopolitical shifts. There are three potential scenarios of how the oil trade will evolve.
Continuation: Trade will remain at the current level or slightly lower, provided Moscow and New Delhi can resolve the payment and transportation issues, and maintain their strategic partnership despite the pressure from the US and its allies. India could also diversify its sources of oil by increasing its imports from other countries, such as the US, Iraq, Nigeria, or Saudi Arabia, to reduce its dependence on Russia and balance its relations with other partners.
Expansion: Trade can expand if the discounts offered by Russia are attractive enough to outweigh the costs and risks involved, and if India decides to deepen its energy and strategic ties with Russia, as a counterweight to China and a hedge against the US. India could also leverage its oil trade with Russia to enhance its cooperation in other areas, such as defense, nuclear, space, and technology, and to explore new opportunities in the Russian Far East and the Arctic regions.
Reduction: There could be a decrease in the oil trade if the issues related to payment and transportation remain unresolved or become too costly to overcome, and if the sanctions on Russia are tightened or extended. However, given India’s commitment to strategic autonomy and maintaining strong ties with Russia, the prospect of deviating from its current position is not likely. The two nations are actively collaborating on a sustainable trade mechanism encompassing oil and other sectors.
India’s complex oil trade with Russia, which is impacted by geopolitical challenges and strategic considerations, faces hurdles in payment, transportation, and global sanctions. Future scenarios therefore hinge on diplomatic finesse, resolving trade impediments and navigating global oil market dynamics amid an evolving geopolitical landscape. The intricate balancing act between India’s energy security, strategic autonomy, and global alliances will shape the trajectory of this critical bilateral cooperation.
