Crude oil diplomacy

India should protect its longer-term interests

The drive by private sector refiners Reliance Industries Ltd (RIL) and Rosneft-owned Nayara Energy to import larger quantities of crude oil from Russia is likely to impact India’s diplomatic standing with Western allies and West Asia, currently the country’s top suppliers. Last month, Reliance and Nayara accounted for a combined 69 per cent of oil shipments from Russia, making it India’s second-largest oil supplier last month, overtaking traditional ally Saudi Arabia, and just behind Iraq. Urals trades at significant discounts to the benchmark Brent, making it a compelling option for refiners in the public and private sectors, with global prices soaring on account of supply dislocations following the Ukraine-Russia crisis. While it is true that import decisions are taken by private sector entities, the government may need to address the question of whether this is a desirable situation for the country.

Prima facie, there is no logical argument against private refiners maximising profitability by sourcing inputs from the cheapest available source, especially when the state-owned oil companies are doing the same. But state-owned refiners’ output is sold in the domestic market. The case of the private refiners is far trickier since a significant portion of their production is exported, sometimes to markets that have imposed sanctions on Russia. In the intricate world of geopolitical diplomacy, business case arguments, no matter how cogent, may not always be considered appropriate. The private refiners themselves may well argue that they do not violate any domestic political protocols since India has officially taken a strictly “neutral” position vis-à-vis Russia’s invasion of Ukraine in successive votes in the United Nations, partially balanced by some shaded criticism of Russia’s failure to explore diplomatic options.
 

Predictably, India’s diplomatic position, taken in view of the Indian military’s dependence on Russian matériel and spares, has provoked outspoken discomfiture in the US and the European Union—although a spirited response from the foreign minister succeeded in gaining India a grudging acceptance of its particular interest. These hard-won and nuanced diplomatic gains, however, are liable to weaken if India were to persist with a carte blanche to organisations to import Urals crude. The image of India along with China effectively throwing Vladimir Putin a lifeline as Europe seeks to cut its fossil fuel dependence on Moscow is not a good look globally. Nor does India have China’s heft to pull it off.

More to the point, New Delhi could also find itself under pressure from its principal suppliers, Iraq and Saudi Arabia, if it were to persist. Already, the latter felt compelled to cut prices, fearing an erosion in its market share, but it is unlikely to appreciate such ruction in the long run. When added to discomfort in the Islamic world over some recent events, India should do everything in its power to minimise economic tensions. The practical economic imperative to do so will become more compelling when these geographies become bigger suppliers to Europe in the near future. The levers to address this problem lie in the government’s control, since commercial crude oil imports require licences and it could utilise this lever to good effect to secure India’s longer-term interests.