InvestorQ : Why is India buying Russian crude oil so aggressively and do you see any repercussions from US and UK?
Katherine Gonsalves made post

Why is India buying Russian crude oil so aggressively and do you see any repercussions from US and UK?

rhea Babu answered.
11 months ago

With Saudi Aramco suddenly hiking prices of crude for most of its Asian customers, India is left with little choice but veer more towards Russia. As of now, even EU has not stopped buying Russian crude, and there is no sanction against existing contracts and for PSU companies. That is the loophole that India is currently using. With sanctions cornering Russian crude exports, India is getting Russia’s Ural Crude at steep discounts.

Now the discounts are extremely significant. For instance, Russia is offering India and China discounts of $30/bbl on crude, which on the current oil price of $110/bbl, is a huge relief to the balance of trade for India. India relies on imported crude for meeting 80-85% of its daily crude oil requirements, so prices of crude is a sensitive issue. India is already feeling the strain of higher inflation, higher trade deficit and a widening current account deficit.

Since India is honouring old contracts and imports are being done through the PSU window, India is not violating the American sanctions in any way. This is something even America has confirmed. However, there is an issue of form and an issue of substance. The US has already underlined that supporting Russia in any way is like supporting the invasion, which is currently resulting in huge civilian losses. This could have diplomatic repercussions.

In the month of March 2022, India imported 6 million barrels of Ural Crude from Russia, which is 50% of 2021 quantity. However, this is even now not anywhere close to what India buys from the Middle East, Africa and the US. Interestingly, even China has refrained from entering into fresh contracts with Russia for oil. For now, it looks like a good way to rein in the trade and current account deficit but chinks are visible in the armour.

Indian refiners like IOCL and BPCL buying Russian crude face a challenge financing this crude due to sanctions on Russian banks. This is a major constraint. India is currently exploring about creating a rupee-Rouble channel to finance Indo-Russian trade in crude oil. At the same time, private companies do not have PSU immunity. Hence, Indian private companies are refusing to buy Russian crude looking at larger business interests with other countries.