Why India is buying Russian oil

Until recently, India had bought hardly any oil from Russia. For perspective, in FY 2012, India bought about 2.4% of its total oil imports (in volume terms) from Russia. In FY21, it was just 1.7%.

Nonetheless, 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. But as the prospect increased, so did the price of oil. After Russia’s invasion of Ukraine in late February, it averaged $84.7 in January, $94.1 in February and rose to $112.9 in March.

India’s dependence on oil imports has increased over the years. From April to September this year, it imported 86.8% of its total consumption. It imported 84.8% during the same period in 2021-22.

So when oil prices rise, two things happen. Firstly, the price of petroleum products like petrol, diesel, kerosene and cooking gas also goes up unless, of course, the government tells the Oil Marketing Companies (OMCs) not to increase the prices. It then compensates the OMCs with taxes. But as history tells us, OMCs are not always compensated for 100% under-recoveries. Therefore, one incurs the cost either in the form of higher prices or in the form of less compensation.

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 their interest rates to control decadal-high inflation. This factor is also putting pressure on the value of the rupee. A weak rupee coupled with high prices of petroleum products lead to retail inflation and create hardships for citizens.

Keeping these factors in mind, India decided to buy oil from Russia even though it did not go down well with the US and many countries in Europe. From April to September, in terms of volume, India bought about 14.6% of the total oil imported from Russia. In fact, Russia is now India’s third largest import partner when it comes to oil, after Saudi Arabia and Iraq, displacing the United Arab Emirates from third place.

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

Also, the original idea was to buy oil from Russia for Rs. This will reduce the demand for the dollar India needs to buy imported oil which, in turn, will put less pressure on the rupee’s value against the dollar.

Nonetheless, media reports suggest 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. Between April and September, the country imported goods worth only $ 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 Reuters news report in late September states that “in July Russian oil supply traders asked at least two Indian companies to settle in dirhams. But that payment did not materialize and eventually the oil imports were paid in dollars.” done in.

All told, Russian oil is being bought in dollars, as long as India is buying oil at a discount to the prevailing market price, the whole thing is understandable. And that’s the long and the short of it.