Why India ramped up Russian oil imports, easing pressure on Moscow

Summary

• India's Russian oil imports since Ukraine war soar
• New Delhi feels it lost out when Iranian sanctions imposed
• Wants to buy cheap oil, in part because China doing same
• Officials reassure state, private refiners on purchases
• US pressure fails to sway Modi, Russia remains key ally

Since the start of the war in Ukraine, the United States and its allies have leaned on countries to buy less Russian oil in a bid to punish Moscow for its aggression.

Indian refiners have done the opposite, snapping up more Russian crude while the government explores ways to protect domestic oil firms from punishment should they fall foul of sanctions.

The result has been a huge leap in volumes from Russia. In May, India imported 819,000 barrels per day (bpd), from 277,000 bpd in April and 33,000 bpd a year ago. Russia is now the second biggest supplier to India, replacing Saudi Arabia, while Iraq continues to be the largest.

While the increase in volumes is known, some of the ways in which India has communicated its strategy on Russian oil purchases to key players and offered assurances to the companies involved have not been reported.

European countries and the United States have imposed heavy sanctions on Russia since Moscow sent troops into Ukraine on Feb. 24. While New Delhi has called for an immediate ceasefire in Ukraine, it has not explicitly condemned the invasion, which Russia says is a "special military operation".

An Indian government official said India plans to continue with purchases of Russian oil, available at a discount that is now narrowing. "If India stops buying oil from Russia, the entire world will be chasing the same pieces of oil and that will further push up oil prices," he said.

Government and refinery officials have said India's main reason for buying Russian crude is commercial.

After China, India has done more than any country to compensate for the drop in demand for Russian oil from elsewhere, undermining Western efforts to isolate Moscow and hasten an end to the war in Ukraine.

The officials say New Delhi wants to avoid repeating what it sees as the mistakes of the past: abiding by sanctions on Iran and winding down oil imports, only to see its main regional rival China continue unpunished and benefit economically.

"India has the attitude that if China is buying, why wouldn't we?" said Robin Mills, chief executive of energy consultancy Qamar Energy.

"India doesn't want to be in the same position again when China continued to buy Iranian oil and India stopped it."

While Prime Minister Narendra Modi's government values good relations with Washington and the West, Indian officials say domestic needs come first and argue that Russia has been a better friend than the United States in energy cooperation.

Economic necessity is also behind the shift. Indian refiners have bought Russian oil at a lower cost although the discounts are now shrinking, while New Delhi often takes a dig at oil production strategies of OPEC. Inflation is meanwhile biting hard.

Indian energy minister Hardeep Singh Puri often blames OPEC for holding barrels back from the market, and said high prices were not good for producers or consumers. "We have to look after our own interests," Puri said last month.

U.S. President Joe Biden has described India's energy policy response to the Ukraine crisis as "somewhat shaky".

Indian officials counter that what refiners are doing is legal and some European countries are still buying Russian oil and gas. Executives at state-owned and private refineries do not expect purchases of Russian crude to slow any time soon.

Last month, Indian Foreign Minister Subrahmanyam Jaishankar posed the question at a conference: "Why are Indian money and funds coming from India seen as funding the war (in Ukraine), when Europe also buys gas from Russia?"

Referring to U.S. sanctions on Iranian and Venezuelan crude, he said: "They (Europe and the U.S.) have squeezed every other source of oil we have and then say you will not go to the market and get the best deal for the people; it's not a fair approach".

Russian oil assets

In April, India's oil secretary, Pankaj Jain, called a meeting of state-run firms to discuss the possibility of buying Russian oil and gas assets, said three company officials present, at a time when Western firms were looking to pull out.

The proposal floated was to create a company 51% owned by the government, with the remainder distributed among state-run firms as a way of fending off the threat of secondary U.S. sanctions should they be imposed.

India's oil ministry did not respond to a Reuters e-mail seeking comment.

The government is yet to move forward with the proposal, partly because the first right of refusal for Russian oil assets dropped by Western firms lay with Russian oil firms, and as the threat of secondary sanctions had receded for now, the company officials said.

But the idea would put India, the world's third biggest oil consumer and importer, at odds with Washington and its allies, who want a united global response to isolate Moscow.

Nevertheless, private and state refiners in India say they are in regular contact with government officials, apprising them of Russian oil purchase plans and receiving assurances that should problems arise, New Delhi would step in and try and resolve them.

They see no immediate reason for the vastly expanded Russian oil purchases to be reduced, although refinery and government officials stressed that commercial, and not political considerations were paramount.

The steep discounts that Indian refiners enjoyed soon after the Ukraine war began - of $20-30 per barrel - have narrowed significantly as Russia finds new markets for its oil. They stand at just $7-8 on delivered basis, still cheaper than viable alternatives.

Some refinery officials said slimmer margins could be eroded further as insurance and freight costs to move Russian oil had risen significantly.

"If Middle Eastern producers reduce official prices for their crude, then we may have to rethink purchases of Russian oil," one said. Saudi Arabia raised crude prices to Asian buyers to near record levels this month.

A possible cap on how much buyers can offer Russia for its oil discussed at a recent G7 summit could work in India's favour were it to happen, but Indian officials said they would only comply if all importers paid the same price. It is not clear whether the proposal is workable, however.

Reliable Russian support
Russia has also helped India in other fields of energy.

While Western companies' attempts to build nuclear power plants in India have stumbled, two Russian-built reactors have been in commercial operation in Kudankulam, southern India, since 2014 and 2017.

Construction on two more started in 2017 and Modi and Russian President Vladimir Putin agreed in 2018 to build six more.

Two years earlier, the involvement of both men was instrumental in getting the acquisition of Indian refiner Essar by a consortium led by Kremlin oil giant Rosneft over the line.

The $13 billion price tag for the debt-laden enterprise made it the biggest foreign acquisition in India at the time and Russia's largest outbound deal.

Also, Russia has long supported India internationally on critical issues including Kashmir, a territory disputed between India, Pakistan and China, and is its most important source of foreign military hardware.

That all means New Delhi is reluctant to put U.S. interests ahead of those of Russia, especially after it felt it was harmed economically by sanctions on oil from Iran and Venezuela and potash, a key ingredient in fertilisers, from Belarus.

Under Modi's nationalist government, India has pursued an assertive foreign policy, standing up to China in a two-year military border standoff and rejecting Western criticism of domestic policies some say are authoritarian and divisive.

Modi has a particularly close eye on China, experts said.

"It is not in the interest of India or others who have identified China as the major systemic rival to move away from Russia," said former diplomat Ashok Sajjanhar, although he added India's ties with Washington and its allies remained the most important.

The United States has offered to sell more defence equipment and oil to India, for example, and New Delhi joined a U.S.-led trade partnership Indo-Pacific Economic Framework for Prosperity.

India is a member of the Quad alliance, which links it with the United States, Japan and Australia. India also signed a free trade agreement with Australia, talks for which initially began in 2011.