India's energy dilemma: is cheap Russian oil worth tensions with West?

With New Delhi in talks with Moscow to increase crude imports, analysts say high oil prices make this a viable strategy

An Indian Oil fuel station in Mumbai. The state-run corporation bought three million barrels of oil from Russia last week to meet energy needs, an Indian government official said on Friday. AFP

India, Asia’s third-largest economy, faces a dilemma.

It hopes to increase imports of Russian oil, currently an abundant source in a tight market, but the move could upset its trading partners in the West.

Reducing the economic impact of higher crude prices is important to India, but the country must weigh up the benefits of such a move against the backlash it may face from countries that have imposed sanctions on Moscow.

With India being the world’s third-largest consumer of crude and its dependence on oil imports to meet 85 per cent of its energy requirements, analysts say New Delhi has little choice if it wants to manage its finances more effectively, control inflation and jump-start economic growth.

“India may not be viewed positively by the western world if they import oil from Russia at a discounted price,” says Amit Jain, chief strategist, global asset class, at Ashika Group, a financial services company in Mumbai.

“But in my view, the loss to gross domestic product with prevailing oil prices is too much of an economic cost for India. Hence, they are in a dilemma and have limited choices.”

Moscow is offering India oil at a discount as it faces a squeeze on its energy exports, Reuters and Bloomberg, reported, quoting Indian government sources.

Asked in parliament whether there were discussions about buying discounted crude from Russia, India’s oil minister, Hardeep Singh Puri, said the government would “explore all options”.

“There are reports and there are contacts. I myself have had a conversation with the appropriate levels of the Russian Federation. These are discussions currently under way,” the minister said on Monday.

There are, however, several issues that would need to be considered, including “insurance, freight and the payment arrangement”, he told politicians.

According to commodity data and analytics company Kpler, Russian oil shipments bound for India have already increased .

“Cargoes of Russian crude to India are fairly infrequent. We saw 34 thousand barrels per day (kbd) of arrivals via 12 cargoes across 2021,” said Matt Smith, lead oil analyst at Kpler.

“Four cargoes of Urals [crude] have loaded since the start of March and are bound for India, set to all discharge by early April,” he said.

“This is about a third of the entire volume discharged last year, a significant uptick.” Stronger flows of Russian crude to India are expected going forward, he said.

Because of its massive dependence on on oil imports, India is particularly vulnerable to the challenge of steep oil prices, which rose to a 14-year high this month.

Brent, the global benchmark for two thirds of the world’s oil, soared to a notch under $140 per barrel this month amid Russia’s invasion of Ukraine. It has since given up some gains amid talks between Russia and Ukraine and concerns of demand growth in China owing to rising Covid-19 cases.

Brent ended trading on Friday up 1.21 per at $107.9 and West Texas Intermediate, the gauge that tracks US crude, was also 1.67 per cent higher, at $104.7.

Even with oil retreating from recent highs, crude above $100 per barrel is a massive challenge for India’s energy security. Demand for fuel is rising as the economy starts to rebound, after taking a hit by the pandemic, analysts say.

Importing oil at higher rates will certainly widen the country’s trade deficit, fan rising inflation and dent the government’s finances. It may contribute in further opening up the budgetary gap and could lead to a weakening of the Indian rupee.

A 10 per cent rise in oil prices leads to a 0.2 percentage point drop in GDP and a 0.4 percentage point increase in retail inflation, according to estimates by Japanese investment bank Nomura. Retail inflation in India has already exceeded the Reserve Bank of India’s upper target of 6 per cent, according to the latest official figures, released for February.

“Since India has not imposed any sanction against Russia, it is but natural that India is interested in importing discounted crude oil from Russia,” says Sujan Hajra, chief economist and executive director at Anand Rathi Shares & Stock Brokers.

This “should be seen just as a commercial business decision”, he says.

“As part of ensuring energy security, India is trying to diversify sourcing of crude,” said Mr Hajra. “Increasing the share of Russia is part of the move. If India gets an assured supply of crude oil from Russia at favourable terms, it is possible that the share of Russia in India’s oil imports would increase further.”

India’s oil imports from Russia have historically been low, at about 1.5 per cent of total imports in recent years, according to data from Anand Rathi. Iraq is India’s biggest supplier of oil, followed by Saudi Arabia. The UAE is its third-largest source market.

“India has imported relatively less oil from Russia because of logistics,” says Amit Bhandari, senior fellow for energy, investment and connectivity at Mumbai-based foreign policy think tank Gateway House.

“Russia has the large western Europe market next door, while India has large reserves of oil in the neighbouring West Asia.”

But countries that are shunning Russian oil may put pressure on Indian sources of crude supply and the potential rise in prices for limited supplies will make India’s already big problem even bigger.

“India imports over four million barrels per day of oil, and high prices of petroleum are a major problem,” says Mr Bhandari.

“If oil is available at a lower price, it will definitely be welcome,” at the cost of facing "some criticism” for buying cut-price oil from Moscow.

On Thursday, foreign ministry spokesman Arindam Bagchi said that India, as an energy-importing country, had “needs”.

“About the imports of oil or gas from Russia ... we know that a lot of countries are buying from Russia [including countries in Europe],” he said.

The US has halted oil purchases from Russia in response to its military aggression and continued shelling of Ukrainian cities. Europe, which heavily relies on Russian hydrocarbons for its energy needs has pledged to phase out Russian oil and gas by the end of this year.

Many countries are still importing energy from Russia, and there no restrictions on Indian oil companies buying crude from Moscow.

New Delhi, which has strong relations with the Kremlin, has avoided condemning Russia’s invasion of Ukraine.

“While we made a decision about banning the Russian import of oil, every country has not made that decision .... and they have different economic reasoning as to why different countries do,” White House Press Secretary Jen Psaki said at a media briefing on Friday.

Ms Psaki said that India importing oil at low prices from Russia would not flout sanctions, but sounded a warning.

“What we would project or convey to any leader around the world is that ... the rest of the world is watching where you’re going to stand as it relates to this conflict.”

A statement from the Russian embassy in India said Russia’s Deputy Prime Minister, Alexander Novak, has already spoken to India’s oil minister, Mr Puri, this month.

“We are interested in further attracting Indian investment to the Russian oil and gas sector and expanding Russian companies’ sales networks in India,” the statement said.

Analysts say India may simply not have enough options in place to avoid leaning on Russia for its oil needs if the current geopolitical situation persisted and crude prices remain elevated.

“There aren’t any short-term fixes that India can rely on,” said Mr Bhandari. “Any strategies to deal with high oil prices have to be long term.”

Solutions such as stepping up renewable energy development will take time and cannot provide near-term relief.

For several years, India enjoyed oil prices in the $40 to $60 a barrel range. Mr Bhandari said the government should have used that window to "invest in oil and gas companies, which would have cushioned the blow".

India should start preparing to better manage swings in energy prices in the years to come, he said.