How good is the decision to double oil imports from Russia

At a time when the price of Brent Crude has once again crossed $120/bbl, India is looking to double down on its Russian oil imports. The state refiners like IOCL, BPCL and MRPL are looking to sharply increase their purchase of heavily-discounted supplies of crude from Rosneft of Russia.

Most of Russian oil has been sanctioned by the Western nations for the human rights violations in Ukraine. However, from the start, India has begged to differ.

For a long time, India refused to support any of the anti-Russia motions either in the UNGA or in the UN Security Council. The argument had been that the West did not adequately explore diplomatic options before putting stringent sanctions on Russia.

That is a fair point. However, what could be a little more difficult to justify is that India has increased the share of Russia in its oil basket from 1.5% in June 2021 to 25% in June 2022, an 18-fold increase.

Normally, in the global markets, the big traders like Glencore are the ones that procure oil in bulk from companies like Rosneft. However, with Glencore opting out of dealing with Russia any longer, the onus is on India to directly strike deals with Rosneft.

India is surely getting hefty discounts ranging from $35/bbl to $40/bbl on the crude oil that it has been importing from Russia. Not surprising, as Russia is keen to get rid of excess supplies of oil.

What needs to be understood here is that the deals that the oil refiners propose to strike with the oil drillers like Rosneft, is on top of shipments that India already buys from Russia via other deals. Indian banks have agreed to fully finance all cargoes from Russia.

For India, the Russian offer comes as a god-gifted choice since India has been struggling with high crude prices and its concomitant impact on inflation. It hits two birds with one stone.

The fact is that, with EU planning to entirely exit Russian oil by December 2022, an unprecedented amount of Russian crude has been heading towards India and China. Even as European buyers are scrambling for replacements from other sources, including the OPEC.

This has led to the sharp bounce in oil prices which bounced from lows of $100/bbl in April to a level of $120/bbl in June. It is largely the Russian oil that is spooking markets.

One has to just look at the numbers to understand how the Russian share of the Indian basket has grown in the last few months. Between March and May 2022, India bought over 40 million barrels of Russian oil, which is roughly about 20% more than flows for the entire 2021.

Russian oil arrivals in India were 34,000 bpd in June 2021, went to 284,000 bpd in April 2022 and to 740,000 bpd in May 2022. It is expected to touch 1.05 million bpd in June 2022. 

To begin with, India’s purchases of Russian crude aren’t illegal or in breach of any sanctions. However, India is under pressure from the Biden administration and EU to stop doing business with Moscow.

This would be the key for the West to dry up funding access for Russia. India has held the view that its imports were miniscule compared to EU, but that argument cannot hold in the light of the sharp spike in recent months.

The bigger challenge will be on the secondary oil front. The West may put sanctions on oil based on Russian crude, which could constrain most of the export markets for India. That will be a tough situation.

The US is India’s to trading partner and India runs a huge trade surplus with the US. It really cannot afford to antagonize the US and the West beyond a point. That would be playing on the minds of the policymakers.
For now, India sees a huge arbitrage.

They are getting their oil quotas at much below the market rates, which is helping them keep inflation in check. In a sense, India is justified in its stand, although in an interconnected world, it may be tough to act insular for too long.