The Russia-India Oil Saga
Since India started purchasing discounted Russian crude oil, it has become an agenda on almost all international forums. These purchases, combined with its neutral stance on Russia’s invasion of Ukraine, put India’s “morality” under scrutiny on these forums. But while Indian diplomats defended India’s position, an important story was left uncovered. What happened to the imported Russian Oil, and how did it benefit India and Indians?
As the West began sanctioning Russian crude, Russia started to offer steep discounts of $15–20 per barrel on its crude blends when the global oil prices rose by nearly 15% within a couple of months (Feb’22 — Apr’22). Naturally, nations with large fossil fuel consumption, like India and China, became principal buyers of the discounted crude, importing up to 70% of Russian oil exports, according to global crude tracking agency, Vortexa. India has shown great enthusiasm for importing the discounted oil, as is evident from the increase in the share of Russian crude in its oil imports. Russian crude made up 40% of the total Indian crude imports in Feb’23 as compared to less than 1% in the pre-war period. The volume of India’s Russian oil imports has now crossed its combined imports from Saudi Arabia and Iraq, its decades-old oil partners.
Who precisely in India is buying the discounted crude?
Both private and public-sector (government-owned) refiners are importing discounted Russian oil.
Reliance Industries and Nayara Energy are the primary buyers among the private players, importing almost half of the total Russian imports as of March 2023. Even though Reliance operates the world’s largest refining complex in Jamnagar, the combined refining capacity of the two private refiners constitutes only a third of India’s total refining capacity. This makes their share in Russian imports disproportionate to their refining capacities compared to their public sector counterparts. Compared to pre-invasion levels, these refiners imported almost ten times higher volume of crude from Russia due to the discounts.
For the other half of Russian oil imports, in the public sector, Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) are the primary buyers. IOCL was among the earliest contenders for Russian oil, placing orders at a $20–25 per barrel discount as early as March 2022. IOCL recently also signed a term deal with Russian oil producer Rosneft to increase their imports and diversify the oil blends imported.
So, how do these companies utilise the Russian crude imports?
All the companies importing the crude are refiners that import and refine it into petroleum products like petrol, diesel, aviation fuel, etc., at their refineries across India.
But the destination for these refined products, derived from Russian crude oil, is where the private and public refiners differ. While almost the entire share of refined products by private players is being exported, public refineries are responsible for supplying domestic consumption.
When Europe decided to sanction Russian imports post its invasion of Ukraine, almost 45% of its diesel imports and 30% of its crude (refined to produce diesel) were sourced from Russia. The decision to reduce dependence on Russian supply meant they needed to scourge for alternate sources of petroleum products to plug the supply gap created. This became critical as Europe, being the world’s largest consumer of diesel, depends on it for essential functions like transportation, power generation, heating, and industrial use.
Indian private refiners like Reliance, with their large refining capacity, proved to be a reliable source of petroleum products for Europe. In the months leading to the European ban on Russian products, Europe’s share in India’s petroleum products exports rose from almost 16% to 22% in Feb-June’22, further increasing to nearly 30% a year later in April’23. Europe imported almost half of the Indian jet fuel exports in the same period.
On the back of cheaper Russian oil and increased European demand, Indian private refiners got better margins in exporting the majority volume of its refined products. Their exports to Europe were already on the rise in the pre-invasion period when European exports suddenly rose by around 20% in the months following the invasion.
To give a perspective on how beneficial these margins were to private refiners, Reliance’s profits in the quarter immediately following the Russian invasion of Ukraine (April-Jun’22) jumped about 46%. Most of this was attributed to the earnings from the Oil-to-Chemicals (O2C) business, which accounts for almost 65% of Reliance’s revenue. CEO Mukesh Ambani said, “The O2C segment posted its highest-ever operating profit despite global uncertainties and disruptions in commodity trade flows”. This is believed to be mainly because of the lower input costs of Russian imports.
While the private refiners are exporting the Russian supply in the form of refined products, the public sector Oil Marketing Companies (OMCs) are ensuring that the domestic market is well supplied, the average Indian remains insulated from the upheaval in global oil prices, and meanwhile, its margins also improve from the discounted Russian imports.
Before the Russian invasion, Indian public sector OMCs were already under heavy losses as they absorbed the impact of rising global oil prices and did not pass them on to consumers. According to the Petroleum Minister Mr. Hardeep Singh Puri, while the average cost of the Indian oil import basket rose by more than 100% from Nov’20-Nov’22, the retail fuel prices increased only by 18% for petrol and 26% for diesel. This resulted in heavy losses for the public sector companies that saw profits drop 200% in the 1st half of 2022–23 compared to the same period a year earlier.
The import of discounted Russian crude, coupled with strong domestic demand, has helped improve the refining margins for public-sector refiners. According to an answer by a member of Parliament, the Indian Government saved nearly $3.6 billion by importing discounted Russian oil. The refining margins are usually measured using the Gross Refining Margins (GRM), which is the difference in the value of refined products to the input feedstock costs. According to the companies’ financial documents, GRM for state-run refiners rose 68–102% in FY23 compared to FY22. These margins have helped them recover losses incurred over the last few years. But according to regulatory filings by the public-sector refineries, the increased profits have been offset by the low retail fuel prices, which have remained unchanged since Nov’22. Still, market agencies like ICICI Securities have predicted profits for the companies in FY24.
That’s all nice. But how do the cheap Russian imports help the common man, as the Government claims?
There are numerous ways these imports have helping the average Indian, some more direct than others.
Firstly, the increased margins for the public sector refiners due to Russian imports have helped them sustain the domestic retail supply at low prices without slipping into irrecoverable losses, which would have caused significant disturbances in domestic prices. Due to this, the consumer is not paying the difference when global oil prices rise, and the price of petrol and diesel has remained relatively unchanged.
Next, to rope in the super-profits earned by private refiners by exporting refined petroleum products to Europe, the Government introduced a ‘windfall gains tax’ on exporting petroleum products in July 2022. Reliance reported a dent of ₹711Cr in its revenue due to the windfall tax going to the Government. According to government sources, the state will earn approximately ₹25,000Cr (nearly $3Bil) from this windfall tax on petroleum products. These earnings will contribute towards various Government projects and schemes.
While the private players seem to be making most of the profits from discounted Russian oil, these will eventually be passed onto the general population through their employees, stock markets, investors, etc. It will aid their expansion which would generate further economic activity. Also, the boost they are providing to Indian exports will contribute to the nation’s GDP, helping its economy rise at a global level. In the long term, these economic gains will result in better investment into the economy, leading to employment opportunities, increased incomes, and a better standard of living.
But with the Russian invasion of Ukraine still going on and sanctions still in place, how are the Western nations responding to India profiting from Russian imports?
As discussed in the beginning, in the early phase of the war, India’s integrity was constantly questioned on international forums. With India’s exports of refined products to Europe increasing along with its Russian imports, India was accused of giving Russian crude a backdoor entry into Europe. But as the markets evolved over the year, many nations, including the US, realised the importance of Indian petroleum product exports in maintaining a balanced supply in global markets and preventing sudden price shocks.
Chief economist at Vortexa, David Wech, acknowledged that “The world will have a very hard time to live without Russian oil,” saying cutting Moscow out entirely would cause a “deep recession.”
Also, experts realised that large-volume imports by countries like India are vital for the success of the price cap placed by G7 nations and its allies on Russian crude and petroleum products.
In the above context, the Western Nations, for now, don’t mind Indian refiners profiting from Russian imports and increased margins.
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