On 27th December, the Kremlin released a presidential decree banning the exports of crude oil and oil products to the countries that are adhering to the G7 Oil price cap. The ban will be applicable from 01st Feb until 01st July, with Putin having the power to make a “special decision” to remove the ban in some individual cases.
With Russia’s “special military operation” on Ukraine going to hit 12 months now, the world is witnessing yet another economic showdown between Russia and Western nations with the prospects of having adverse ramifications on the global economy. Meanwhile, this new development has again put New Delhi’s tightrope diplomacy in a conundrum with a primary impact on the economy, politics, and foreign policy.
Igniting Flare in the Barrel: Western Oil Price Cap
G7 countries, along with Australia and the EU, called out for imposing a price cap on Russia’s seaborne crude oil and oil products exports on the pretext of controlling oil price inflation and preventing Russia from diverting the money to fund the war on Ukraine. The price cap was fixed at $60, slightly below the average market price of $80, and came into force on 05th Dec 2022. The cap is subject to review after 90 days and adjust the pricing, which must be at least below 5% of the “average market price for Russian oil and petroleum products.”
All the countries decreed that any nation not following the price cap would not be able to access oil tankers and financing, servicing, and insurance facilities from the companies of G7, EU, and Australia. At the same time, the EU and UK altogether banned seaborne crude oil (special exemption to Bulgaria) from Russia. However, the EU has not banned the oil supply through pipelines to EU countries which mainly goes to Germany, Poland, Czech Republic, Hungary, and Slovakia.
This becomes vital as 95% of insurance facilities to Russian exports are supplied by London-based International group P&I clubs, and more than 50% of oil vessels are supplied by Greece, meaning countries don’t have a choice but to adhere to the price cap.
The move aimed to decrease the Russian revenue from oil exports which almost doubled from $50 billion in normal years to $164 billion in the first 11 months of 2022. Consequently, we’ve witnessed a decrease of 17% in Russian oil exports, which is the highest since the war began.
However, Russia rejected the oil price cap and decreed that if any country seeks to implement the same, it will not supply crude oil and oil products to that country. Moreover, Russia said the move would only destabilise the global energy market as Russia accounts for 11% of global crude oil exports, making it the third largest exporter after the US and Saudi Arabia. Therefore, sidelining Russia will lead to a steep rise in global oil prices if Russia cuts its production either due to a lack of buyers or intentionally.
This becomes more pertinent because the West has already put sanctions on top oil producers-Venezuela and Iran- from the market, and putting a price cap on Russia will further increase the shortage of crude oil, resulting in the potential rise of crude oil prices above $120.
But why has Russia been so confident in its position?
Russia has already shifted its exports to Asian buyers, including India, China, and Turkey. With India and China being among the top 3 oil importers in the world, Russian coffers will not suffer a major decline, at least not the amount that will impact its war efforts.
Second, G7 countries were planning to impose a price cap from May 2022 but couldn’t impose it as they were not confident about the implications of the price cap on Russia. This gave a lot of leeway to Putin to start preparing for an impending price cap. Resultantly, Russia bought several oil tankers from Venezuela and Iran and created its own fleet of oil tankers to at least fulfil the demand of its two largest buyers, India and China. As of now, the number is projected to be around 100-110, and they are infamously called “Shadow Fleets” as they do not come up with any insurance or servicing facilities. However, Russia has begun to develop its own insurance and reinsurance facilities and is also looking for Asian insurers for its buyers.
Third, Russia has started to use techniques mastered by Iranians to sell their crude oil in the black market without being noticed by the US. It includes turning off the Automatic Identification System that is responsible for tracking global sea shipments around the world. As per Windward, a predictive intelligence company, these dark activities have been raised by 600% by the Russian-affiliated crude oil tankers since the war broke out. Turning off AIS will allow tankers to make ship to ship transfers of Russian oil on the high seas, thus eradicating the information about the source of origin of the oil.
Therefore, Russia seems to have been preparing for the ultimate showdown and it will be complicated to predict whether the West will successfully reduce Russia’s war chest. However, Russian Finance Minister Anton Siluanov pointed out that the price cap can potentially impact its budget deficit by 2% in 2023, which makes it dangerous in the long term for the country, given that a substantial chunk of the budget is going to war efforts.
Troika of Indian Dependence on Russia
India officially rejected the price cap of G7 nations even before it came into force. To cull out a dilemma from the Indian leadership and make it more attractive to purchase Russian oil, it gave further discounts to India, causing the overall price to go below $50 for Ural crude, thus ensuring India can get access to European insurance and oil fleets as technically it is following the G7 price cap. The discount is estimated to be almost 50% of the market price of Ural crude. This resulted in the all-time high import of crude oil of 1.25 million barrels per day in December itself, which is almost 25% of India’s December imports. The imports are projected to rise in the coming months as well.
Although we cannot assess the long-term ramifications of the price cap and oil export ban in such a short period, going deeper into the issue, we can assess that Russian oil imports have a triangular significance to India.
Domestic Economy
Looking at current prospects, the price cap war will increase the Russian dependence on India as a major market and induce them to sell oil at more discounted rates. The situation becomes unique in India’s case in that, unlike China, it has a balancing position between the warring parties, making it critical for Russia to keep India at its peril through attractive pricing.
As India imports over 80% of its oil requirements, cheap rates mean that India’s oil-intensive industries, such as airline and transport, will have a reduced price burden and increased profits. The rise in global oil prices has already doubled India’s oil import bill in FY 2022 to $119 billion, and in the first half of the fiscal year 2023 (April-September), it has already reached $90 billion. Moreover, Indian Rupee’s value touched a new low at 83.29 rupees to $1, causing a further impact on the inflationary movement in the country. These factors have played a significant role in the rise in the prices of essential commodities. And therefore, importing cheap Russian oil has become important to maintain the inflationary movements domestically and also decrease the trade deficit. As per industry estimates, India has saved 35,000 thousand crore rupees since the war broke out in February.
As a result, retail inflation in India decreased to 5.72% in December from 7.41% in September. In the same time period, Russia became the largest oil exporter to India, and now it accounts for 22% of total oil imports. Moreover, India and Russia have implemented the Rupee-Rouble trade settlements officially, which will immensely help India increase its exports to Russia and decrease the trade deficit of around $16.2 billion.
Another important consideration is that the highest share of India’s export revenue is petroleum products, and buying cheap Russian oil ensures that refineries can produce these items at reliable rates for buyers. The rise in overall oil imports also suggests an increase in overall industrial activity in the country, showing positive signs of a potential rebound of the Indian market in the coming months.
However, on the other side of the bay, we might witness a rise in oil prices due to Putin’s ban on oil exports from February. As countries don’t have an option but to shift their dependence on middle east countries, oil prices will shoot up, which might impact global inflation and cause an upward trend in the prices of commodities.
Domestic Politics & Budget
Commodity prices always lead to certain political impacts on any nation. And in a country like India, where delivering essential necessities is a trend of political debates, Russian oil and fertilisers at cheap rates have the power to turn the tables and lead the political narrative.
As India is nearing the General Elections in March 2024 and in between, there are 4 major state elections in Karnataka, Madhya Pradesh, Rajasthan, and Chhattisgarh, controlling the inflation and reducing the prices of at least essential commodities will be among the top priorities of New Delhi’s political class. However, this time, uncontrollable global events have taken a major toll on the country’s fiscal and monetary policy. This means that India might depend more on cheap Russian oil for the next few months, especially in a scenario where the Russia-Ukraine war seems nowhere to end.
Would that mean India will limit its strategic autonomy due to Elections?
Curbing inflation and maintaining a constant growth rate is an agenda of any government and merging it with elections, it becomes a political necessity for the political parties. Now where this line blurs is a matter of time and decisions of the current establishment in the wake of new developments. However, the government might majorly move ahead with non-populist measures due to the lack of strong opposition and a fairly positive persona of the current ruling class.
As the budget session of Lok Sabha is nearing, the political aspect of Indian dependence on Russian oil will get further clarity. There might be possibilities that the government will bring tax rate reductions for the salaried class and new schemes for relief to the farmers. Apart from that, it will also try to reduce the prices of petroleum and essential commodities to soothe the Indian pockets. However, every new freebie, price reduction, or extension of government schemes causes an extra burden on the country’s exchequer, and given that India’s fiscal deficit is already around 6.4%, its dependence on Russian oil has somewhat become a necessity.
Foreign Policy
From a foreign policy perspective, India has been playing tightrope diplomacy with both the West and Russia amidst the war. However, with newer developments and the fact that the war is not about to reach its conclusion soon, India will suffer significant pressure from the West to curb importing Russian oil.
On the other hand, as India has one of the highest oil refineries in the world and the capability to buy Russian oil amidst western pressure, many small countries will look forward to India for purchasing cheap Russian oil indirectly. Therefore the relevance of India among small nations in terms of oil and oil products is going to increase multifolds in the coming future. For instance, Bangladesh is already in talks with New Delhi about purchasing Russian oil from India.
Second, as India has a diplomatic and economic manoeuvre over Russia and the West, countries are looking forward to India as a preferable mediator who can persuade both sides to end the prolonged conflict. This has also been reaffirmed by the Russian Foreign Minister, Sergei Lavrov, and gestures of the Ukrainian President asking PM Modi to implement the peace process. With India having the chairmanship of G20 this year, it could be a great possibility to showcase its rising global stature by making both sides sit at a single table.
Therefore, it remains to be seen how India maintains its strategic autonomy in the face of constant heat while simultaneously emerging as a global geopolitical player.
What’s Ahead
In the great geopolitical chess game where every move leads to multiple possibilities, Russia’s latest decision is among the many that can open doors to several consequences. As the news is in transition with newer developments, predicting the ultimate impact of the Oil & Price war in the short term is untenable. However, analysing the previous trends and future certainties, we can deduce the several possibilities impacting both India and the world in general.
As Russia has warned of decreasing crude oil production, the foremost impact will be on global oil prices and inflation. However, looking at the data of December and January, average oil prices have remained well below $80, showing no immediate impact of the price cap. It remains to be seen how prices will react to the Russian ban on oil exports from February.
For the price cap, as new routes and alternatives are being developed, Russia’s oil export will rebound after a brief downturn. However, there is a certain possibility that Russia might have to cut its oil production due to a reduction in the number of buyers. As of now, Bulgaria is the only major European buyer, which might also cut its oil imports as it settles with other alternatives. The International Energy Agency (IEA) has projected a mighty decrease in oil production by March end of 2023. Moreover, with winters at the helm, few specialised oil tankers, and buyers located at higher distances, Russia’s freight cost has significantly increased. But to compete with its middle-east competitors, it has to increase its discounts, causing a further dip in the revenues of Russian oil companies.
As far as the global economy is concerned, the oil battle is only one among the several factors apart from the Chinese slowdown, resurgence in Covid-19, high-interest rates, and inflation that will lead the market sentiment in 2023. As per the World Bank’s Global Commodity markets Outlook Report October 2022, though there will be a dip in 2023, oil prices will remain 50% high through 2024 as compared to average prices of the past 5 years.
Therefore, the price war will have several ramifications in the coming months, and as the war is set to become more intense, newer developments will follow, causing further uncertainties in the overall outlook for the global economy.
"Nayan Mishra is the Author and Researcher having expertise in the field of geoeconomics, international & business law, international relations and personal finance. He has worked with multiple organizations across industries with the aim to build a content ecosystem that fosters the reader’s psyche and organization's authority."