Russia is offering deep discounts on its crude oil to seek more buyers amid western sanctions. The discount offering comes at a time when global crude oil prices are hovering at elevated levels and economies globally not being in good shape hit by supply chain disruptions due to the Covid-19 pandemic and later Russia’s invasion in Ukraine. Here’s what the discount on Russian crude oil means for India:
How Much of Crude Oil India Imports Overall and From Russia?
India imports over 80 per cent of its crude oil requirements. The country imported 193.5 million tonnes of crude oil in the current financial year till February, at a cost of $105.8 billion. The country’s total consumption of petroleum products stood at 183.3 million tonnes during the period. The crude oil in the country mainly comes from the Middle East and the US.
From Russia, in the whole year 2021, the country bought just 12 million barrels of the oil, which is only 2 per cent of its total imports. India’s own domestic production is more than that.
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How Much is the Russian Discount and Will India Benefit?
Russia is offering as much as $35 per barrel discounts on the crude oil prices prevailing before the Russia-Ukraine war. If India raises crude supply from Russia, it may help contain the domestic oil price rises. In a meeting with British Foreign Secretary Elizabeth Truss, External Affairs Minister S Jaishankar on Thursday said, “When oil prices go up, it’s natural for countries to look for good deals for their people."
He added that “I’m pretty sure if we wait 2-3 months and look at the big buyers of Russian gas and oil, I suspect the list won’t be any different than what it used to be & we won’t be in the top-10."
Offering discounts, Russia also wants India to buy 15 million barrels of oil as an initial deal. According to data compiled by commodities research group Kpler, India did not import any oil from Russia in January and February but March and April contracts have already touched six million barrels for the Urals grade oil.
Cheaper Crude Oil Impact on Domestic Economy
The lower crude oil prices will be needed for India to keep the domestic petroleum prices under check that have already crossed Rs 100 per litre in Delhi and even more in some other states. The lower rate can keep inflation under control as costlier petroleum affects other commodities’ prices and, hence, room for the RBI to not raise interest rates.
Retail inflation in February rose to an eight-month high of 6.07 per cent, which is outside the Reserve Bank of India’s (RBI) target levels. The RBI may resort to raising rates to bring the inflation under its target range of 4-6 per cent.
Global Crude Oil Prices Scenario
The global oil prices have been at elevated levels since the time Russia invaded Ukraine and subsequently global oil supply halted. Currently, Brent crude stands at $108.32 per barrel, while the WTI is at 103.62 per barrel.
After Russian President Vladimir Putin approved a special military operation in Ukraine’s Donbass region on February 24, the Brent crude oil prices hit USD 100 per barrel for the first time since 2014. In the following days, the US’ West Texas Intermediate crude futures even skyrocketed to $130.50 a barrel, its highest since July 2008, before retreating. Brent also hit a high of $139.13, also its highest since July 2008.
Rupee-Rouble Trade Mechanism
Talks are going on on the rupee-rouble trade between India and Russia, as the West has put sanctions on Russia for invading Ukraine. Russia has offered the payments using Russia’s messaging system SPFS. The deal has not been finalised yet.
Under the mechanisms, Indian exporters will get paid in the local currency for their exports to Russia instead of the dollar or euro, standard international currencies.
India spent $105.8 billion to import crude oil from various countries in the current financial year till February. The rupee-rouble trade may help India save the forex reserves to meet other needs and financial stability.
The mechanism is expected to be finalised during the Russian Foreign Minister Sergey Lavrov’s ongoing visit in India. “Welcoming the Foreign Minister of the Russian Federation Sergey Lavrov as he arrives in New Delhi for an official visit," Ministry of External Affairs Arindam Bagchi said in a tweet on Thursday.
Russian President Vladimir Putin said on Thursday that he has signed a decree saying foreign buyers must pay in roubles for Russian gas from April 1, and contracts would be halted if these payments were not made.
Indian Refining Companies’ Worry
Apart from benefits, there are worries also regarding cheaper crude oil imports for Indian refinery companies. The country’s refining firms are facing a challenge to fund these discounted purchases.
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