Concerns have been looming large on the sanctions on Russian oil, which is heading for another major oil shock in the world. Russia is the second biggest exporter of oil in the world, and the EU is the biggest importer of oil from Russia. The EU has prohibited maritime exports of Russian oil and levied price cap of US $60 per barrel in December 2022. These followed suit to the USA, G-7 and Australia for price capping on Russian oil. The angry Russia retaliated and banned the export of oil to these nations from February 1, 2023 for 6 months till July 1, 2023
About 80 percent of Russian oil export move by western shippers. Most of these shippers are under insurance liability, provided by International Group (IG). Eventually, the maritime ban by EU will restrict the western shippers to move the Russian oil. These two moves, viz. maritime insurance ban and price cap, vis-à-vis, counter move by Russia to ban export to these nations, will engulf the world in another major global oil crisis .
Given these, oil prices are bound to rise in the world in 2023. Theoretically, it should have spill over impact on India, since over 90 percent of India’s oil requirement is met by imports. As and when, oil prices increased, the country succumbed to inflation above the affordable limit.
Nonetheless, India is proven to be in a different situation with the sanctions. Various reports suggest that sanctions will not impact India, as it was reticent to the sanctions. Consequently, India’s import of oil from Russia perked up since the advent of the Russia-Ukraine war, despite against global resistance.
To ride over the sanctions, India and Russia have set up alternative arrangements. Indian refineries have accepted Russian insurance. Russian oil suppliers are trying to handle Urals oil transport to India themselves, using their own vessels and shipping arrangement. Further, Indian government has permitted nine Indian banks to open vostro accounts with Russian banks. This will facilitate to deal with Russian oil in rupee trade in currency swapping deal. Indian UCO bank has opened the vostro accounts with Russian Gazprombank and VTB banks
From merely 2 percent of oil import from Russia, India’s import of oil from Russia spurred by 18 percent within six months of 2022-23. During April-October 2022, India imported 24,139 thousand tone of oil from Russia (2,968 thousand tone in the corresponding period in 2021), underpinning a growth by over 87.5 percent.
After the EU sanctions, China and India emerged the biggest importers of Russian oil. India is better located to buy Russian Urals than China because of shorter transport route and its refineries are well suited to refine Russian oil. India recognized ships and insurance covers, provided by Russia, which are no longer recognized in Europe.
Oil viewers assessed that crossfire between the nations sanctioning oil from Russia and the counter action by Russia, will help India to reap the benefits. According to Reuters, “ For some deals, this month ( December 2022), the prices of Ural in Indian ports, including insurance and delivery by ships, has fallen to around minus by US$12 -15 per barrel versus a monthly average of dated Brent crude” .
Russian oil price was much lower than the average basket price of oil imported in India. During April-October 2022, while the average basket price of oil was US$102.5 per barrel, the average price of Russian oil was US$94.1 per barrel. The prices of all other major suppliers were above the country’s basket price of oil.
These let India to reap a big advantage of saving foreign exchange outgo to import oil. During April-December 2022, India benefited by US$1.5 million while increasing Russian oil import. These demonstrate that India’s reliance on Russia oil will increase and is likely to be diversified from OPEC and oil rich countries.
The new trajectory of India’s oil reliance on Russia and Russia’s intent to diversify oil to Asia will provide two advantages to India’s oil economy. First, it will reduce pressure on Balance of Payment ( BOP). About one-fifth of India’s total import embraces crude oil import. Given the Russian crude rallying the lowest price in the basket and Indian refineries accepting Russian maritime insurance and shipping services, oil watchers view India to increase oil import from Russia and gain substantially from the foreign exchange outgo. Second, with the opening of vostro accounts, which will facilitate Rupee trade between the two nations, pressure on foreign exchange outgo will reduce. Lastly, India is likely to be let off from the clutches of OPEC dominating global oil prices.
In summing up, India is placed in an advantageous situation with the sanction on Russian oil. The decade long deep and friendly political and economical relations with Russia will accentuate a new trajectory of trade in energy, in addition to defence. In other words, oil dependency on Russia will increase India’s resilience to oil volatility, spearheaded by OPEC.