After days of speculation, Indian Oil Corporation (IOC), the nation’s top oil firm, finally bought as much as 3 million barrels of crude oil that Russia had offered at a steep discount ($25 per barrel) to prevailing international rates.
The purchase, made through a trader, is the first since Russia’s February 24 invasion of Ukraine that brought international pressure for isolating Russian President Vladimir Putin’s administration.
Putin’s decision to pound Ukraine has put his country in a tight spot with the US recently announcing a complete halt to oil imports from Russia while UK Prime Minister Boris Johnson openly advocated the need for the world to stop buying crude oil from Russia to put a stop to “President Vladimir Putin’s war machine”.
What’s behind India’s decision?
Stuck with oil that it could monetise, Russia has been reaching out to India. A few days back, Union Oil Minister Hardeep Singh Puri told Rajya Sabha that the country would evaluate the Russian offer to sell crude oil at discounted prices after considering aspects such as insurance and freight required to move the fuel from the non-traditional supplier. The Centre did evaluate and got Russia to make an offer India just couldn’t refuse.
As quoted by media reports, Gargi Rao, Economic Research Analyst at GlobalData, said, “India’s attempt to diversify its import sources (of crude oil) will tend to reduce the financial burden on the government, thereby reducing the risk of high import bills. Moreover, cheaper crude may bring down the current cost of production and help cool off inflationary pressures.”
Cheaper and consistent supply of quality Brent crude oil from Russia augurs well for the Indian economy. Discounts like the one offered by Russia now ($25 per barrel) are clearly a blessing for India’s economy at a time when global crude prices have risen to their highest levels since 2008.
Does it make economic sense?
Given the current political and inflation situations back home, India, which imports 85 per cent of its oil needs, is looking to cut spiralling energy bills through purchases from anywhere it can get at cheaper rates. And Russia, which desperately needs money to fund its ongoing conflict with Ukraine, came as a friend in need. A $25 per barrel discount was too good an offer for India to say no to, especially at a time when domestic inflation is peaking.
A Nomura Research report stated that such a discount works well for India because every 10% rise in crude oil prices would lead to a 0.3 percentage point-widening in India’s current account deficit (CAD), and in turn, weaken the rupee further.
The Russia deal also suits India because Moscow has promised to pay for shipping and insurance charges, a big relief for New Delhi which was worried the risk of war may increase its overhead costs.
Lastly, the Russia purchase is in tandem with India’s changing policy of reducing its oil dependence on Gulf countries and diversifing to Russia and the US.
What’s the West objecting to?
India’s move to purchase Russian oil is viewed as tacit support for Putin. The country has historic diplomatic and defence ties with Russia and has called for an end to the violence in Ukraine but stopped short of condemning the invasion.
New Delhi has consistently asked all stakeholders to resolve differences through dialogue. It has, however, abstained in all United Nations resolutions against Russia, a decision which hasn’t gone down well with the US leadership.
The Joe Biden administration has, however, refrained from openly criticising the Modi government, considering Washington’s growing ties with New Delhi in a need to counter Chinese aggression. Meanwhile, India succeeded in keeping its age-old ties with Russia intact.
Many countries, including European nations, remain heavily dependent on fuel from Russia, the world’s second-largest crude oil exporter behind Saudi Arabia. In contrast, India fulfils just 1.3 per cent of all its oil needs from Russia.
Unlike the sanctions the US imposed on Iran over its controversial nuclear programme, oil and energy trade with Russia has not been banned. This means international payment systems are available to settle any purchase made from Russia.
What’s Washington saying about the oil buy?
India taking up Russia’s offer of discounted crude oil would not be a violation of American sanctions, the White House has said.
“Our message to any country continues to be that abide by the sanctions that we have put in place and recommended,” White House Press Secretary Jen Psaki told reporters at her daily news conference a few days back.
“I don’t believe this would be violating that (sanctions). But also think about where you want to stand when history books are written at this moment in time. Support for the Russian leadership is support for an invasion that obviously is having a devastating impact,” Psaki added.
Also read: Economic consequences of the war in Ukraine
Officials of the Biden administration have shown an understanding of India’s position and have told lawmakers that New Delhi has a major dependence on Russian military supplies for its national security.
However, Indian-American Congressman Dr Ami Bera expressed disappointment at India’s decision to buy Russian oil at a steeply discounted rate. “New Delhi would be choosing to side with Vladimir Putin at a pivotal moment in history when countries across the world are united in support of the Ukrainian people and against Russia’s deadly invasion,” he said.
“As the world’s largest democracy and as a leader of the Quad, India has a responsibility to ensure its actions do not directly or indirectly support Putin and his invasion,” Bera said in a statement.
Why’s UK disappointed with India?
The UK wants every country to move away from using Russian oil and gas because it directly funds Putin’s war machine, British Prime Minister Boris Johnson’s spokesperson said recently.
Asked about India’s proposed move to purchase crude oil from Russia, the spokesperson said the UK Prime Minister respects every country’s individual position but wants to broaden the coalition of countries against the Russian President’s actions in Ukraine.
“The Prime Minister would want every country to move away from using Russian oil and gas,” the spokesperson told PTI at a Downing Street briefing. “It is the funding that the Putin regime receives largely through oil and gas that directly goes towards funding the Russian war machine. Everyone needs to be conscious of that.”
Johnson has said that countries needed to “avoid being blackmailed” by Putin by weaning off Russia’s fossil fuels and exploring other partnerships.
“The UK is building an international coalition to deal with the new reality we face. The world must wean itself off Russian hydrocarbons and starve Putin’s addiction to oil and gas. Saudi Arabia and the United Arab Emirates are key international partners in that effort,” he said, ahead of his visit to the Middle East.