Explained: What New US Sanctions On Russian Oil Mean For India's Energy Security And Inflation Woes

The United States' (US) latest sanctions on Russian oil producers and transporters have triggered growing concerns about their potential impact on India's energy imports. 

With the two-month wind-down period nearing its end, Indian refiners and policymakers are bracing for significant disruptions and financial adjustments.

Immediate Impact of US Sanctions on India

The outgoing Biden administration imposed sanctions targeting Russian oil producers Gazprom Neft and Surgutneftegaz, as well as 183 tankers transporting Russian crude. 

Out of the newly sanctioned 183 tankers, 75 of them have transported Russian oil to India in the past, according to data by Kpler. Just last year alone, the 183 sanctioned tankers transported around 687 million barrels of crude, of which 30 per cent were shipped to India.

These measures make it challenging for buyers to conduct dollar-denominated transactions or do business with US-based companies.

India, which sources over a third of its crude from Russia, is particularly vulnerable to these restrictions. In 2021, Russian oil constituted just 12 per cent of India’s imports, but this surged to 37.6 per cent by 2024 due to steep price discounts. 

Now, with sanctions on key tankers, India risks losing access to roughly 5 lakh barrels per day, potentially disrupting its oil supply chain.

Economic Ripple Effects: Rising Oil Prices and Inflation

Goldman Sachs has projected that Brent crude prices could exceed $85 per barrel in the short term due to reduced Russian oil output caused by the sanctions. This could have severe consequences for India’s economy. To name a few pertinent:

• Inflation Surge: Higher oil prices are likely to increase costs for consumers and businesses, compounding inflationary pressures.

• Poor Prospects For Rate Cut: With India’s GDP growth already slowing in Quarter Two (Q2) Financial Year 2024-25 (FY25), a rise in inflation could limit the Reserve Bank of India’s ability to cut rates, stalling efforts to stimulate economic growth.

• Reduced Consumer Spending: Elevated fuel prices may depress household consumption, further weighing on economic recovery.

What short-term strategies are Indian Refiners looking to?

Indian refiners are working to complete payments for Russian oil transactions within two days instead of the usual five, ensuring they remain compliant with US sanctions during the wind-down period.

Additionally, state-run refiners have stopped dealing with US-sanctioned tankers and entities to avoid potential penalties.

Indian banks are also requiring certificates of origin for Russian crude to ensure transactions do not involve sanctioned entities. Meanwhile, the government is in discussions with US officials to seek clarity on the sanctions and explore alternative solutions.

What are the future Possible Scenarios for India-Russia Oil Trade?

1. Continued Russian Discounts: To remain competitive, Russia may offer India deeper discounts, especially for crude priced below the $60-per-barrel cap imposed by the Group of Seven (G7) nations. These discounts would enable Russia to continue using Western tankers and insurance services while maintaining its market share in India.

2. Alternative Supply Chains: India could explore sourcing oil from non-sanctioned entities or diversify its imports to other countries. However, this would mean losing the cost advantage of Russian oil.

3. Sanctions Relief Under New US Leadership: With President-elect Donald Trump set to assume office soon, there is speculation about a potential resolution to the Ukraine conflict. A brokered peace deal could result in lifting the latest sanctions, easing the pressure on India’s crude imports.

What shall be the Long-Term Implications for Indian Refiners?

The sanctions underscore the risks of over-reliance on any single oil supplier, even one offering significant price advantages. India’s energy security strategy may need to pivot toward:

• Diversifying Suppliers: Building relationships with multiple oil-exporting nations to reduce dependency on any single source.

• Expanding Domestic Production: Investing in exploration and production to reduce reliance on imports.

• Accelerating Green Energy Initiatives: Promoting renewable energy sources to minimize the impact of global oil market fluctuations.