Why India Can’t Quit Russian Oil

Leaders of 12 democracies huddled in an Alpine resort in Bavaria last month. They included presidents and prime ministers of the G-7 group of industrialized nations as well as their counterparts from India, South Africa, Indonesia, Argentina, and Senegal. But the handshakes, embraces, and jokes couldn’t mask the deep divide among them: While the G-7 leaders’ closing communique focused on Russia’s war in Ukraine and efforts to cut the Kremlin’s earnings from energy exports, the 12-nation statement didn’t mention Ukraine, the war, or oil even once.

At the center of this gulf between the West and other big democracies stands India, a close friend of the United States and European nations that has faced mounting scrutiny in recent months for purchasing vast volumes of oil from Russia. A galaxy of world leaders has spoken with Indian Prime Minister Narendra Modi, many visiting him in New Delhi, to coax him into stopping or at least limiting his country’s consumption of Russian crude.

But their failure so far, showcased by the seemingly dissonant statements that emerged from the recent summit in Germany, underscores how a combination of economic gains and constraints is driving India’s energy choices, according to analysts.

At a time when global oil prices have skyrocketed, India’s External Affairs Minister Subrahmanyam Jaishankar has argued that the country is merely securing the best deals for itself—especially with Western sanctions keeping Iranian and Venezuelan crude off the market. Yet New Delhi also has other, often overlooked reasons to gulp down Russian oil during the current conflict. A series of investments that Indian and Russian public sector companies have made in each other’s oil sectors has created an umbilical cord between their energy industries. The result is that it’s in India’s interest to keep Russian oil and gas flowing, especially at a time when many others are shunning Moscow.

“Whether the West likes it or not, India will try to secure its energy needs—and that’s what it’s doing,” said Edward Chow, a veteran energy analyst and former Chevron executive.

The benefits for India are significant. Urals, the Russian oil mix, was $36 per barrel cheaper than Brent, the international oil benchmark, on average last month. That means India effectively shaved $27.5 million off its oil import bill every day—or $852 million over the month of May.

Some reports have suggested that as much as 40 percent of these imports have gone to private refineries. That still leaves $511 million in a month’s savings for India’s public-owned oil importers. Just 2.5 months of such discounted crude would allow the country to recoup a year’s budget outlay—$1.29 billion—for its massive school lunch program, which feeds an estimated 120 million children every day. Four months of similar savings would help India comfortably cover the $1.72 billion annual budget of its space program, which is preparing for a first manned mission.

India’s rupee has been sliding against the U.S. dollar, magnifying the price differential between the Brent and Urals oil for the country, said Vandana Hari, founder of the Singapore-based oil intelligence firm Vanda Insights. “A stronger dollar and weaker rupee make it a double whammy for Indian crude imports,” she said. “It makes economic sense for India to buy Russian crude or other energy products.”

The windfall appears to have exceeded India’s own expectations. Bristling at criticism over the surge in imports, Jaishankar said in March that despite the increased purchases he was “pretty sure” that two or three months later, India would still not figure among the “top 10” buyers of Russian energy. In fact, India was the eighth-largest importer of Russian fossil fuels in the first 100 days of the war. In May, only China imported more Russian oil.

Still, short-term economic benefits aren’t the only incentive for India. In a series of investments beginning in 2016, four major public sector energy companies—ONGC Videsh Ltd., Oil India Ltd., Indian Oil Corporation Ltd., and Bharat Petro Resources Ltd.—purchased a 49.9 percent stake in the Vankorneft oil field in Eastern Siberia. Separately, a consortium of Oil India Ltd., Indian Oil Corporation Ltd., and Bharat Petro Resources Ltd. bought a 29.9 percent stake in a different field in the Arctic. Their total investments in these two projects amounted to $4.2 billion.

“The shareholders, of which the Indian government is a major one, would certainly want to see the Russian projects continue to operate and export oil and [liquefied natural gas],” Hari said.

These investments have delivered. ONGC Videsh Ltd. had earned $537 million in dividends from its Vankorneft investment by 2019. Oil India Ltd. earned $393 million from its Russian investments in 2020 alone. Now, with Russia’s traditional consumers in Europe increasingly turning off the tap, future dividends are at risk unless others step in.

“As the West tightens its sanctions, the pressure on the Indian government to increase its own energy trade with Moscow will only grow,” said Hari Seshasayee, a global fellow at the Wilson Center.

It helps the Modi government that India’s two private refineries have also expanded their purchase of the Urals crude. The world’s largest refinery by capacity, in Jamnagar along the country’s western coastline, secured 27 percent of its oil from Russia in May, up from just 5 percent before April. The facility belongs to Reliance Industries Ltd., owned by India’s—and Asia’s—second-richest person, Mukesh Ambani. The refinery scores high in its ability to process crude of different grades, allowing it to pivot between different sources based on prices.

Compared to Jamnagar, India’s other private refinery is smaller. But its ties to Russia are direct and deep. Originally owned by the Essar Group, it was bought over in 2017 by Russian state-owned energy behemoth Rosneft (with a 49 percent stake) and a consortium of Singapore-based commodities firm Trafigura and Russian investment company UCP (another 49 percent stake). In effect, it is majority Russian-owned. Now called Nayara Energy, this facility is designed to refine heavier varieties of oil, like the kind that usually constitute the Urals mix.

“Rosneft’s stake in Nayara gives the Russian company an outlet to place more of its crude barrels into the private refiner’s system,” said Hari of Vanda Insights. Nayara has so far not faced any Western sanctions, even though Rosneft has been sanctioned. And India has denied reports suggesting that its refineries are acting as conduits for Russian oil to reach the West. Refined petroleum products are India’s biggest source of export revenue.

But Rosneft’s stakes in Nayara mean that irrespective of the identity of the refiner’s customers, the India-based firm’s revenue will add to the Russian state’s coffers, analysts said. Taxes that UCP would pay on its earnings from Nayara would also go to the Kremlin. Nayara’s latest financial statement shows that in the first three months of 2022, its net income rose by 17 percent compared to the same period in 2021.

Nayara’s association with Rosneft has hurt its credit rating since the start of the war, which might impact the company’s ability to raise funds in the future. The European Union’s ban on insurance for tankers ferrying Russian oil, which will kick in at the end of the year, is also expected to hurt India’s ability to import crude, experts said.

But other moves by the West are more confounding, some analysts suggested. A G-7 proposal for a cap on the price of already discounted Russian oil, for instance, might end up only further increasing the demand for Urals crude. “The Biden administration is caught in a bit of a bind,” Chow said. “On the one hand, it wants countries like India to reduce their Russian oil imports. But on the other hand, it knows that stopping all Russian oil from entering the market will only drive gasoline prices in the United States up even more.”

Meanwhile, India has shown no interest in pulling out of its investments in Russian energy—finding suitors willing to buy those shares won’t be easy even if New Delhi were to try getting rid of them, Seshasayee pointed out. Oil and gas fields typically have lifespans of a few decades, so it can make sense to wait out conflicts or tensions, he said, citing the example of Chevron’s investments in Venezuela despite U.S. sanctions against the Nicolás Maduro regime.

“You can afford to play the long game,” Seshasayee said. “That’s what I would expect India to do in Russia.”