India’s Oil Import From Russia Is Much Ado About Nothing

“I would put my energy security first. If the fuel is available at a discount, why shouldn’t I buy it?” said Sitharaman at an industry event on Saturday.

Russia has offered crude oil to India at a sharply discounted rate of $35 barrel to pre-war prices.

But how big an impact will purchase of Russia crude oil will have on India’s import bill is the big question here.

What's the deal?

Russia is offering its Urals grade oil to India to encourage the latter to buy more shipments from Russia. At a time when Brent crude oil price has hovered above $100, the deal on Russian oil will mean a steep reduction in current purchase prices. But here’s the catch. While India imports 80 per cent of its crude oil requirements, in 2021, the country purchased just 12 million barrels of crude oil from Russia, constituting only 2 per cent of its total imports, less than its own domestic production. On the other hand, imports from the Middle Eastern countries account for 52.7 per cent of India’s import basket, whereas Africa and the US account for 15 per cent and 14 per cent of oil imports respectively.

In the current financial year till February, India imported 193.5 million tonnes of crude oil worth $105.8 billion. The demand for petroleum products in India was seen at 183.3 million tonnes in the same period. The main crude oil suppliers to India are the Middle Eastern nations and the US.

“Going ahead, whether or not there would be any substantial impact on India’s oil bill will depend on the source country when it comes to an impact of imports as far as India is concerned. But I think import demand would increase as the economy is moving towards revival and it that increase in demand would not really be only a function of low prices,” said NR Bhanumurthy, vice chancellor, Dr B.R. Ambedkar School of Economics University, Bengaluru.

Bhanumurthy’s observation on the source of oil was seconded by India’s External Affairs Minister S Jaishankar, who said in a meeting with British Foreign Secretary Elizabeth Truss on Thursday, “When oil prices go up, it’s natural for countries to look for good deals for their people. I am pretty sure if we wait 2-3 months and look at the big buyers of Russian gas and oil, I suspect the list won’t be any different than what it used to be & we won’t be in the top-10."

Crude demand and oil bill

In the present context, even if India continues to import crude from Russia at the existing rate, it will neither make an impact on the Indian economy nor that of Russia. Even if there is an increase in concession based imports they are unlikely to become the bulk of the imports, experts point out.

“There will be marginal relief for the OMCs (oil marketing companies) though the price relief for consumers may not be substantial,” said Suvodeep Rakshit, vice-president and senior economist Kotak Institutional Equities.

This is one reason why the Centre has started to raise retail price of petroleum products as well as natural gas in the form of LPG and PNG on a regular basis. At current prices, the OMCs are selling at a discount of Rs 15 per litre on Petrol and the government will allow the companies to recover this cost in the coming days. Petrol and diesel prices in New Delhi on April 1 were Rs 101.81 per litre and Rs 93.07 per litre, respectively. A lower oil price would help India keep its inflation within the Reserve Bank of India-mandated inflation range. High petroleum prices impact the prices of other commodities as well.

The RBI is under pressure to increase policy rates to control inflation since December this 2021. However in its last monetary policy meet it somehow managed to avoid any rate hike to support growth in the economy. 

“A 10 per cent rise in pump prices of petrol and diesel directly leads to 22 basis points rise in CPI inflation. In the case of 10 per cent rise in kerosene and LPG the impact is 26 bps. Second order impacts through higher transport costs etc, assuming 50 per cent pass through of input costs to end users, lead to another 31 basis point taking the total impact to 79 bps in inflation numbers. A Rs. 1 cut in excise and cess on petroleum and diesel leads to Rs 15,000 crores for central revenue,” Saugata Bhattacharya senior vice president and Chief Economist Axis Bank, said.

In February, retail inflation hit an eight-month high of 6.07 per cent, breaching the RBI target levels. If price rise continues, the apex bank would have to consider increasing lending rates to keep inflation within the band of 4-6 per cent.

The Big Obstacle

Even if India decides to make Russia its main source of oil import in the coming months, an obstacle that India will have to deal with is the currency for trade. There is no clarity yet on the terms of the deal yet, as Russia wants India to shun the US dollar and start a Rupee-Rouble trade for all future purchase of goods and services.

The immediate obstacle to the India-Russia oil deal would be the payment mechanism. Due to the sanctions imposed on Russia, there needs to be a dedicated payment system to carry out trade with Russia. If India bypasses the US sanctions on the use of Russian currency for trade, it may attract sanctions against itself in various forms.

Though the talks are yet to be finalized, Russia is learnt to have offered to carry out the payments through SPFS, Russia’s messaging system. Instead of the dollar or euro, the standard international currencies, Indian exporters would be paid in Russia’s currency for exports, if the talks go through. It has also been reported that due to the Russian currency’s high volatility after sanctions were imposed on the country, settlements are expected to be made in the Indian rupee pegged to the dollar and to be deposited into a bank account in India.

“Discussions on the Rupee-Rouble trade are still ongoing. That is something that would be important for the (oil) trade. How that works out would make things clearer. But if Russia becomes India’s source for oil demand, India would be in a much advantageous position for a simple reason that India has been extremely competitive in terms of exports of processed oils. In fact if you look at the export basket, almost 20-25 per cent is oil exports. If we can manage to import the crude from Russia and use it for our refineries and exports, then even Indian companies can sell the processed oils at discounts. That would be advantageous for India. It is only the payments system that could create some obstacles. It is also in the interest of Russia to export oil to India. Payment systems have to be smooth,” Bhanumurthy said.