India's Oil Trade with Russia: A Remarkable Transformation and Emerging Challenges

India's Oil Trade with Russia: A Remarkable Transformation and Emerging Challenges

Following the Russian invasion of Ukraine in February last year, India's oil trade underwent a dramatic transformation. Despite Western sanctions on Russian oil, India's refiners found an opportunity in discounted Russian crude. Over the months, Moscow has emerged as India's primary source of crude oil, accounting for about 40% of the country's crude imports. However, the growth in Indian import of Russian oil faces potential challenges, particularly due to volatile discount levels and payment woes for Indian refiners.

Factors Leading to the Growth in Indian Import of Russian Oil:

1. Western Sanctions on Russian Oil: As a response to the invasion, Western nations imposed sanctions on Russian oil, limiting trade and exports to various countries. This pushed Russia to rely more heavily on countries like India, China, Turkey, and Bulgaria for oil sales.

2. Huge Discounts Offered by Russia: To sustain its oil trade despite sanctions, Russia offered significant discounts on crude oil to interested countries, including India. This provided India with an advantageous opportunity to secure cheaper oil supplies.

India's Benefits from Discounted Russian Oil:

1. Significant Foreign Exchange Savings: By increasing purchases of discounted Russian oil, Indian refiners saved a substantial amount, estimated at $7.17 billion, in foreign exchange during the 14 months ending May 2023.

2. Emergence as a Major Supplier of Refined Petroleum Products: India leveraged its access to discounted Russian crude to refine petroleum products, which it then exported to Europe and other regions. This contributed to robust margins for Indian refiners.

Transformation of Market Shares in India's Oil Suppliers:

1. Russia's Gain and OPEC's Decline: Russia's share in India's oil imports saw a significant surge, while the cumulative market share of OPEC members declined dramatically, owing to India's increased reliance on Russian oil.

Challenges Faced by India in Russian Oil Imports:

1. Volatile Discount Levels: The discounts on Russian oil have fluctuated over time, presenting uncertainty for Indian refiners. With the discounts narrowing and Russia's flagship crude breaching the G7 price cap, the attractiveness of Russian oil may decrease in the future.

2. Payment Woes for Indian Refiners: Western sanctions have caused payment problems for Indian refiners dealing with Russian cargoes. These challenges may further complicate trade between India and Russia.

Conclusion: Despite Western pressure and sanctions on Russian oil, India has chosen to strengthen trade ties with Russia, reaping the benefits of discounted oil and reduced inflationary pressures. However, the future of India's oil trade with Russia faces challenges, with volatile discount levels and payment issues posing potential obstacles. As the landscape evolves, Indian refiners may need to diversify their sources of crude oil to ensure a stable supply chain.

Thank You