DM Deshpande
The US President Trump has now announced sanctions against two major oil giants of Russia-Rosneft and Lukoil. The two largest oil corporations have allegedly funded the Kremlin’s war machine against Ukraine.
This is the first direct action by the US at the level of corporations and is being considered as geopolitically very significant. The news of direct intervention came just after a week after the UK imposed similar sanctions against the same two companies.
Roeneft is a state owned company that accounts for nearly half of the total oil production in Russia. Lukoil is privately owned and managed; together the two firms account for half of all oil exports from Russia. Together they export 3.1 million barrels per day. Their dominant share and size are certain to hit Russia where it hurts the most.
The US sanctions have given time till November 21, to settle all transactions with the two Russian oil companies. While President Trump has claimed that India is moving away from buying Russian oil, India has not officially substantiated those claims. Yet on the ground there is a perceptible decline in imports from Russia.
According to reports the two sanctioned firms account for 83 per cent, of all India’s oil imports from Russia. However, in the light of new sanctions, India has paused new orders. The Indian refineries are left with no choice now. If they buy crude oil from the two sanctioned companies, not only will they find it difficult to make payments but additionally, they will find it very hard to export refined oil and petroleum products due to inherent secondary sanctions. There is a clear understanding of this fact in Russia.
In that sense, the US President has given an honourable exit route to India. In any case, the discounts offered by Russia were tapering off and the economics was no longer working to India’s advantage. By late April the gap between Russian oil and benchmark rates like Brent had shrunk to $2.4 per barrel. It did rise again to $5.13 in September; yet it pales in comparison to the huge discounts, between $20 to $35 per barrel in most of the year 2022 and early 2023.
Take for instance, the logistics costs. Often, Russian oil has to be imported through long routes like Baltic Sea or Black Sea ports to the western coast of India which would cost between $6.5 and $7 million per voyage. West Asia is a long standing and traditional supplier of crude to India.
Even when India took advantage of hefty discounts offered by Russia, ties with the Gulf nations have remained intact. The Persian Gulf is much closer to the western coast of India where the major refineries are located. The per voyage cost is estimated at around $1 million.
Therefore, without discounts Russian oil does not give any cost advantage to Indian refineries. On the contrary, a lot of paperwork, tedious and long routes are deterring Indian companies from resorting to Russian imports.
By stopping oil imports from these two entities India stands to lose $2 per barrel approximately. This is certainly not disastrous considering the fact that the global oil prices have stuck at around $66 per barrel despite the uptick due to new sanctions by the US.
In comparison, the average price of crude last year was around $80 per barrel. Further, India has frozen pump prices of oil for the last three years. Hence India is well positioned to cushion and absorb a hike of $10 to $15 per barrel, posing no problem to its energy security.
Reliance Industries and Indian Oil have indicated that they will abide by the requirements and ensure compliance. India possesses modern refineries that can use a variety of crude sourced from different parts of the world. Also, it may fall back upon its traditional and known sources in the Middle East, even while diversifying its imports from the US and Latin America.
Increasing imports from the US helps India in multiple ways-to correct the current imbalance in bilateral trade, get closer to clinching a trade deal with the US and moving away from AED dominated trade with Russia for supply of oil.
It is not a question of national pride or sovereignty. In the wake of the Russian war with Ukraine that led to sanctions by the western countries, India got an opportunity to pivot towards Russia for hugely discounted oil purchases. This was not dictated by any diplomacy or international relations.
Now also, there is no need to think of the move to reduce oil purchases from Russia as any principle or a question of long standing bilateral relationship. Russia is a coveted and the most trusted Indian partner in defence. That is unlikely to be upset by the current developments.
There are indications that the Russian oil would continue to flow in India, perhaps through longer routes. Indian refineries could import oil from entities other than the two and their associates on which sanctions have been imposed.
In the short run at least, global oil prices may not rise significantly. If a deal is stuck between Russia and Ukraine, it will be in the interest of all stakeholders. However, if the impasse and sanctions continue for a longer time, it will not be easy for the world to cope up without Russian oil and gas. The immediate impact will be on Russia’s ability to continue with the war. However, the hit on its economy is inescapable, though that may come with a time lag.
In the meanwhile India has to quickly find alternative sources for its huge oil requirement, which it is doing in right earnest.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
