Russian Oil Discount Narrows for India

Background: Russia’s Oil Discount to India

• Pre-Ukraine war (pre-Feb 2022):
  • Russian oil’s share in India’s crude imports: ~2%.
  • No significant discount; India primarily imported from Middle East suppliers (Iraq, Saudi Arabia, UAE).
• Post-invasion scenario:
  • Western sanctions forced Russia to sell crude at heavy discounts to non-Western buyers.
  • Discount for India peaked at >$12/barrel vs. Middle Eastern grades in 2022-23.
  • Share of Russian oil in India’s imports rose sharply to 35–40%.
  • Savings in FY24: $7–10 billion in oil import bill.

Relevance : GS 3(Energy Security )

Recent Change: Discount Erosion

• 2024-25 levels:
  • Discount narrowed to $2–3/barrel (Morgan Stanley) or ~$2.2/barrel (Nomura).
  • Causes:
    • Increased competition for Russian crude from other Asian buyers.
    • Logistics costs, sanctions enforcement, and Russia’s better access to “shadow fleets” reducing urgency to discount.
• Impact:
  • Economic advantage to India from Russian oil purchases has reduced drastically.
  • Potential import bill increase if fully replaced: ~$1.5 billion/year (Nomura).
  • Diversification to West Asian/Brazilian crude could raise prices by ~$4–5/barrel, but global oil prices in 2025 are ~$9 lower than 2024 average — cushioning the blow.

US Tariff Escalation and Link to Russian Oil

• Donald Trump’s trade stance:
  • Imposed secondary sanctions-like tariffs on India for Russian oil and defence purchases.
  • Tariff hike:
    • August 1: +25% on Indian goods.
    • August 7: Additional +25% (total 50%).
  • Effective from August 27, 2025.
• Targeted sectors:
  • Goods categories where India competes with Vietnam, Bangladesh, and China — but India now faces higher tariff barriers (50%) compared to their 19–30% range.
  • Exempted categories (pharma, electronics) form ~50% of India’s $80 billion US goods exports.
• Global double standards:
  • China imported $56.26 billion worth of Russian oil in 2024; EU imported $25.2 billion in Russian oil — yet US penalties focus on India.

Current Indian Import Adjustments

• Russian oil imports falling:
  • July 2025: 1.6 million barrels/day from Russia — down 24% from June (Kpler).
  • State-run refiners cutting purchases more sharply than private refiners.
• US crude imports rising:
  • Since May 2025: ~225,000 barrels/day (double early 2025 levels).
  • Potential to scale to 300,000 bpd (2021 highs).
• Likely diversification sources:
  • Traditional Middle East suppliers (Iraq, Saudi Arabia, UAE).
  • Latin America (Brazil).
  • USA (light sweet crude, strategic alignment).

Economic and Policy Implications

• Oil import bill:
  • Immediate rise minimal due to low current global prices.
  • Risk: Diversification may push global prices higher, adding ~$1.8 billion to India’s bill for every $1/barrel global price rise.
• Domestic inflation:
  • Retail pump prices likely to be kept constant by government.
  • Under-recoveries absorbed by public-sector oil marketing companies (OMCs), with possible later government compensation.
• Fiscal deficit:
  • Nomura sees no major upside risk to FY25 target (4–4.4% of GDP).

Strategic Dimensions

• Geopolitical balancing:
  • Reducing dependence on Russian oil may ease US pressure, open space for better trade terms with US energy exports.
  • But complete halt to Russian oil unlikely due to cost, logistics, and strategic partnership considerations.
• India–Russia cooperation beyond oil:
  • Ongoing talks on rare earths, critical minerals, aluminium, fertilisers, and railway transport.
  • Areas of advanced tech cooperation: wind tunnel facilities, small aircraft piston engines, carbon fibre, additive manufacturing.
• Rare earth minerals context:
  • China controls 85–95% of global rare earths; recent Chinese export restrictions have hit Indian automobile production.
  • Diversifying supply from Russia could reduce strategic vulnerability.

Risks and Outlook

• Short-term:
  • Discount erosion removes Russia’s cost advantage.
  • Tariff escalation by US could hit Indian exports by 40–50% in certain categories.
• Medium-term:
  • Supply diversification feasible with minimal inflationary impact if global prices remain soft.
  • Risk of global price uptick from India’s pivot away from Russia.
• Long-term:
  • India’s energy strategy will likely involve a multi-supplier basket to balance cost, security, and geopolitics.
  • Greater emphasis on US crude imports and non-Middle East diversification.
  • Continued Russia cooperation in non-energy sectors to maintain strategic ties.