Explained: Why Russia is offering crude to India at deep discount and its possible implications

by 5paisa Research Team Last Updated: Dec 12, 2022 - 09:42 am 32.4k Views

In what could be a potential bonanza for India’s state-owned oil marketing companies, Russia has reportedly offered India crude oil at $35 per barrel, at a steep discount to the current international market rate of the commodity. 

Interestingly, reports of this offer come even as Russian foreign minister Sergei Lavrov is in New Delhi for talks with the Indian government. 

Russia is targeting exporting its oil to its long-time defence partner India, which is Asia’s second-largest importer of the commodity after China, following restrictions imposed on the Vladimir Putin regime in the wake of the country’s invasion of Ukraine. 

Which Indian companies could be most impacted by this offer?

State-owned oil retailer Indian Oil Corp would be the most impacted, as it has an import arrangement with Russia.

What variety of crude oil is Russia offering to India?

News reports say that Russia is offering its flagship Urals grade crude to India at discounts of as much as $35 a barrel on prices before the war to lure India to lift more shipments

Urals crude has been trading at discounts since the war began. Litasco, the trading arm of Russia Lukoil PJSC, offered a cargo of Urals at a discount of $31.35 to the Dated Brent benchmark in a pricing window organized by S&P Global Platts last week. There were no bids, and it was a deeper discount than a record-low offer by Glencore Plc a little over a week before. China buys a different grade of oil from Russia.

How much oil does Russia want to sell India?

News reports say that Russia wants to sell 15 million barrels contracted for this year just to begin with. 

But why is this offer important at this time? 

This offer is important because India depends on imports to meet 80% of its energy needs. Moreover, India is among a handful of countries that have been defying international sanctions against buying Russian oil. Russian barrels have been flowing to Asia in greater volumes as buyers across Europe and the US shun the supply following the invasion of Ukraine. India and China have been the key buyers.

What other incentives is Russia offering India?

Russia is also offering India rupee-ruble-denominated payments using Russia's messaging system SPFS, that could make trading more attractive for India. 

What has India said about this reported offer?

Nothing officially, at least so far. India will have to weigh its choices carefully before it takes a call, as going with Russia’s offer could damage its relationship with the US and European Union countries, which have made their stand clear that any dealing with Russia could have serious consequences for countries like India. 

New Delhi's attempts to bypass the SWIFT international payment system and lap up cheap Russian oil have also come under criticism from its allies in the Quad grouping, which includes the US, Australia and Japan. Other countries, like the UK, have also put pressure on India.

If India does take the offer, how will a deal be transacted between the two countries?

News wire service Bloomberg reported that the direct purchase is expected to involve Russia's Rosneft and Indian Oil, which have an optional term contract -- that's rarely used -- for close to 15 million barrels a year. It's not clear what the upper end of the buying might be, but India is thought to have limited appetite for the grades being offered, the report said. That contract has a built-in clause that Indian Oil will buy only when it's economical for it to do so, the report added. 

The two sides are exploring routing the oil through Russia's Vladivostok Port in the far east to avoid shipping hurdles from the Baltic Sea in the west of the country. From there, oil shipments could reach India's east coast refineries in less than 20 days, the Bloomberg report said, citing unnamed people.

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