Another sanctions package

India should be cautious about its Russian oil purchases

The European Union’s (EU’s) announcement of a joint decision to phase out imports of Russian crude oil has, together with some other developments, shaken up oil markets. This would be the sixth such package of sanctions of entities linked to the Russian Federation by the countries of the EU, and it would forbid the purchase of seaborne crude oil from Russia in six months and of refined products in eight months. There will also be a ban on insuring Russian oil shipments to third countries such as India. Both these measures are, however, considerably less stringent than earlier proposed because of strong objections from within the bloc. The Hungarian government, the most Moscow-friendly in the EU, demanded that pipeline oil be excluded from any sanctions and that countries dependent on pipeline oil be allowed to substitute seaborne deliveries of oil if the pipelines were interrupted. And Greece, famously home to shipping tycoons, demanded that an earlier ban on Russian oil being carried on European hulls be rescinded.

There are multiple impacts of this EU agreement on the broader oil market and on India in particular. The initial impact on crude oil prices was to cause an immediate appreciation. Brent crude snapped above $120 a barrel initially. The absence of a ban on pipeline oil means that the lasting impact on the Russian oil economy has been minimised since shipments can be diverted elsewhere, including to Indian and Chinese refineries. The insurance ban might be more difficult to evade, and might raise logistics prices noticeably — especially since Europe is taking it to the G-7 as a possible consensus measure to be implemented by that grouping of the world’s rich economies. However, the oil market has multiple other drivers. Since that initial appreciation, prices have trended downwards, driven especially by reports of a breakdown of internal cohesion at “OPEC plus”, the grouping which adds Russia and some other large producers to the Organisation of Petroleum Exporting Countries (OPEC). If Russia leaves or is expelled from OPEC Plus, then Saudi Arabia might start pumping out more barrels than are allowed under the current OPEC Plus agreement.

India has been one of the beneficiaries of the Western sanctions on Russian hydrocarbons, picking up oil shipments at an over 30 per cent discount. Over 40 million barrels, by some estimates, made their way to India between the invasion of Ukraine and early this month; other estimates suggest that 11-15 per cent of Russia’s oil sales are going to India. According to some global energy analyst reports, the shipping data suggests that shipments of Urals crude to India have gone up to 900,000 barrels a day this month from just 33,000 barrels a day in February. Bargain-hunting by Indian refineries is a way to ensure that the overall spike in oil prices is not carried through in totality to Indian refiners’ margins, or to the cost of fuel domestically. Yet there is unquestionably also a danger if India’s share in Russian exports rises much higher. The Wall Street Journal is already describing Indian shipments of refined products such as diesel and petrochemicals to the West “obscuring its origins” because they were “partially made from Russian crude”. Analysts are comparing the refineries that bought Russian crude oil and noting down their exports to and future contracts in the West. Secondary sanctions might still be a distant proposition, but there is a clear political downside risk to these refiners upping their purchases of Russian oil further — especially those that are state-owned.