What does India gain by buying oil from Russia?

Russia’s attack on Ukraine in February changed things as oil prices soared. Indian basket of crude oil averaged $73.3 per barrel in December. At the time, the oil market did not expect Russia to attack Ukraine. However, as the prospects rose, so did the price of oil. It averaged $84.7 in January and $94.1 in February before shooting up to $112.9 in March after Russia invaded Ukraine in late February.

India’s dependence on oil imports has increased over the years. From April to September this year (H1FY23), it imported 86.8% of the total consumption needs. In H1FY22, it had imported 84.8%.

When oil prices rise, two things happen. Firstly, the price of petroleum products like petrol, diesel, kerosene and cooking gas also goes up unless the government tells the state-owned oil marketing companies (OMCs) not to increase the prices. It then compensates the OMCs with taxes. However, as history tells us, OMCs are not always compensated for 100 per cent under-recoveries. So, one incurs the cost, either in the form of high prices or in the form of non-refundable under-recoveries.

Second, with oil prices rising, more dollars are needed to buy oil. This increases the demand for the dollar and in turn puts pressure on the value of the rupee. This is in an environment where the world’s richest central banks are raising interest rates to control decadal-high inflation. This is also putting pressure on the value of Rs. A weak rupee, coupled with high prices of petroleum products, leads to retail inflation, creating hardships for citizens.

Thus, India decided to buy oil from Russia, though it did not go down well with the US and many countries in Europe.

During H1FY23, in terms of volume, India bought about 14.6% of the total oil imported from Russia, which is now India’s third largest import partner in terms of oil, after Saudi Arabia and Iraq, to ​​the United Arab Emirates. Displaced from third place.

Oil from Russia has been bought this year at 7.2% less than the average price India paid for imported oil. This has helped in controlling the trade deficit slightly. The trade deficit is the difference between overall goods exports and goods imports.

The original idea was to buy oil from Russia for Rs. This would have reduced demand for the dollar, requiring India to buy imported oil, which would have eased the pressure on the rupee against the dollar. Nonetheless, media reports have suggested that Indian oil companies continue to buy oil from Russia using dollars.

One possible reason for this could be that Russia hardly imports goods from India. In H1FY23, the country imported goods worth just $1.3 billion from India. In comparison, India has imported oil worth $15.7 billion from Russia.

If Russia had accepted payment for oil in rupees, it would have a huge surplus of rupees, which would not be used immediately.

A September Reuters news report suggested that “in July Russian oil supply traders asked at least two Indian companies to settle in dirhams. That payment, however, did not materialize and, eventually, oil imports in dollars”. been paid.

Russian oil is being bought in dollars, the whole thing is understandable only as long as India is buying oil at a discount to the current market price. That’s the long and short of it.