Exim matters: US sanctions may lead to fall in Russian crude oil imports

Last week, the United States sanctioned top two Russian oil producers, Rosneft and Lukoil, aiming to reduce their export earnings and thus degrade Russia’s ability to continue its war against Ukraine. Moscow said it will not yield to such pressure 

tactics. Major buyers of  Russian oil in India and China indicated that they may curtail their procurements from Russia and look at other sources for their requirements. Crude oil prices went up from about $61 to $65, fearing supply disruptions.  

 

 

Since the Russian invasion of Ukraine in 2022, the western powers have grappled with how to punish Russia without greatly disrupting the global oil and gas supplies. Their various actions like freezing the  Russian financial assets with them, sanctioning various Russian banks and entities, withdrawing insurance cover for vessels carrying Russian oil, capping the price of oil sold by Russian entities and so on have not deterred Russia from pursuing its war against Ukraine. Russia has managed to finance its war by selling four-fifth of its oil exports to entities in China and India, which account for a quarter of its annual revenues. US President Donald Trump tried to bring about a ceasefire through talks with Russian President Vladimir Putin, without success. 

 

Frustrated, he sanctioned  Rosneft and Lukoil and their 36 subsidiaries, essentially threatening that anyone dealing with these entities risks getting shut out from global transaction settlement mechanisms and access to global financial markets.  

Imports of oil from Russia at discounted prices meet about 35 per cent of India’s crude oil requirements. The discounts that ranged around 40-45 per cent in 2022-23 have now shrunk to about 5 per cent. Analysts suggest that if Indian refiners stop buying oil from Russia, their profits will take only a small hit. However, the global oil prices may shoot up if Russia’s oil supplies come to a halt, unless oil producing entities in other countries increase their supplies in the global markets.

 

In August, Trump imposed 25 per cent punitive tariffs for buying Russian oil, in addition to 25 per cent reciprocal tariffs, on goods from India, even while negotiations for a US-India trade agreement were going on. In India, this action was widely seen as a hostile reaction to India’s refusal to acknowledge the role of Trump in defusing India-Pakistan hostilities in May. Giving in to Trump’s unreasonable demands was out of question as that would have made the government look weak. However, some influential voices emerged suggesting a policy review because a few oil refining companies were benefiting from Russian oil while many labor-intensive industries were losing customers in the US due to higher tariffs.

 

Meanwhile, our commerce ministry has been negotiating with the US and latest indications are that agreements have been reached on most contentious issues. However, our commerce minister said last week that we will not negotiate with a gun pointed at our head. That statement has raised concerns on whether the US is putting undue pressure on getting greater market access in agriculture and dairy products that India does not want to give.

 

Now, it appears the Indian refiners will reduce their purchase of oil from Russia rather than risk exclusion from the global financial channels. The exporters hope that it will give the Trump administration reason enough to withdraw the 25 per cent punitive tariffs and conclude the trade negotiations quickly. 

 

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