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Mains level: India's oil trade with Russia, advantages, implications and way forward

What’s the news?

For over a year, India, the world’s third-largest consumer of crude oil with an import dependency of more than 85%, has been entangled in a passionate affair with Russian oil.

Central idea

Aftermath invasion of Ukraine, Russia began offering deep discounts to willing buyers as Western countries turned their backs on its oil. Prior to the conflict, Russia had a minor role in India’s oil trade, which was predominantly dominated by West Asian suppliers like Iraq, Saudi Arabia, and the UAE. However, the discounts offered by Russia led to a drastic transformation, making it India’s primary source of crude oil

According to data from the Directorate General of Commercial Intelligence and Statistics (DGCI&S), India’s oil imports from Russia surged more than tenfold since April 2022.
This steady growth gained momentum, particularly after the G7 imposed a $60-per-barrel price cap on seaborne Russian crude in December 2022.
Russia’s market share skyrocketed to 24.2% during the 14-month period, up from a mere 2% in FY22. In contrast, other major suppliers such as Iraq, Nigeria, and the US witnessed substantial declines in their market shares.
OPEC’s share in India’s oil imports fell by almost half, from 75.3% in May 2022 to 40.3% in May 2023.
Among the major suppliers to India, several OPEC members saw their market shares decline, while Russia’s share surged from 6% to 40.4%.

Before the Ukraine conflict, Russia was a minor player in India’s oil trade, and the country relied heavily on West Asian suppliers like Iraq, Saudi Arabia, and the UAE.
The deep discounts offered by Russia created an opportunity for India to diversify its sources of crude oil, reducing its dependence on a few dominant suppliers and increasing energy security.
The discounts on Russian oil provided significant foreign exchange savings for Indian refiners. Till May 2023, Indian refiners saved approximately $7.17 billion in foreign exchange due to increased purchases of discounted Russian oil.
These savings positively impacted India’s trade balance and current account deficit, contributing to overall economic stability.

India’s deepening energy ties with Russia amid geopolitical tensions and international sanctions may expose India to geopolitical risks.
The association with Russian oil could lead to diplomatic complexities with other nations.
Despite diversifying energy sources, there is still concern about over-reliance on Russian oil.
India’s substantial imports from Russia could leave it vulnerable to supply disruptions or geopolitical developments affecting Russian exports.
The volatility of discount levels on Russian oil adds uncertainty to India’s energy trade calculations.
The lack of transparency in the pricing of Russian oil cargoes makes determining exact discounts challenging, leading to uncertainties in trade negotiations and financial planning.

India should continue diversifying its sources of crude oil to reduce dependence on a single supplier.
Ensuring transparency in oil pricing and understanding the actual discounts offered by Russia can help in making informed decisions.
As India deepens its energy ties with Russia, it should manage its relationships with other oil-producing nations, especially those from OPEC.
India should develop a comprehensive and forward-looking energy policy that considers both short-term energy needs and long-term sustainability.
Adequate energy infrastructure, including ports, pipelines, and storage facilities, is crucial to support diverse energy sources and efficient energy trade.

The unprecedented shift in India’s oil trade reflects the dramatic impact of Russia’s deep discounts amid geopolitical conflicts. Although the recent erosion of discounts poses challenges for Indian refiners, the affair with Russian oil has left a lasting impact on India’s energy trade dynamics. The future of this relationship remains uncertain, but the profound influence of Russia’s discounts will be remembered as a transformative episode in India’s oil trade history.

Also read:

India’s export of Russian oil to West