The Lindsey Graham sanctions bill was approved by the Senate with a vote of 86-11. It still requires approval from the US House of Representatives and the signature of President Donald Trump before it becomes law. If enacted, this legislation would empower the US president to impose further tariffs on nations that persist in acquiring Russian energy.
For India, this threat arises as Russian crude constitutes a substantial portion of its oil imports. However, Pramit Pal Chaudhuri, India Practice Head at Eurasia Group, contends that India’s reliance on Russian oil may be less fixed than it appears.
India has the capacity to replace Russian crude with supplies from other sources, though this might be at a higher cost. The larger concern is the impact on global oil and diesel markets if significant amounts of Russian crude are eliminated from the international supply chain.
This is where the US and Europe could also experience repercussions.
Why is Russian oil crucial for India?
Following Russia’s invasion of Ukraine in 2022, India’s purchases of Russian crude increased sharply. Western sanctions and changes in global oil trade provided Indian refiners the opportunity to procure Russian crude at appealing prices while diversifying their supply sources.
The trend has become even more striking in recent months.
Reports indicate that India’s oil imports from West Asia decreased by approximately 27% to 1.55 million barrels per day from April to June, during which time Russian crude imports witnessed an 8.3% increase to 2.26 million barrels per day.
In July, Russian oil imports surged further to a record 2.64 million barrels per day, nearly 37% higher than in May, representing around half of India’s total oil imports of 5.24 million barrels per day.
Data from the Centre for Research on Energy and Clean Air also revealed that India’s imports of Russian crude rose 2.1% in July compared to June, securing a record for the second consecutive month.
These statistics highlight why India is under scrutiny, but they do not necessarily indicate that the country’s refining system is entrenched in Russian oil.
“We never used to buy Russian oil before the Ukraine war,” Chaudhuri noted.
India’s increased reliance is primarily driven by price and availability rather than a lack of alternative suppliers.
Can India find alternatives to Russian crude?
According to Chaudhuri, India can pivot to other crude sources.
Indian refiners find Russian oil appealing due to its medium-heavy characteristics and competitive pricing. However, similar grades are obtainable from other regions.
“There is no shortage of oil in the world, so we can switch quite easily to another part of the world,” Chaudhuri stated.
He flagged Venezuela as a potential source because its crude characteristics are akin to the medium-heavy oil sourced from Russia.
Shifting away from Russian crude would not be without cost. Indian refiners might forfeit some of the price benefits they’ve enjoyed from Russian supplies. Changes in suppliers could also impact freight costs, crude blends, and refining margins.
Nonetheless, it’s crucial to distinguish between higher costs and an inability to source alternatives.
India boasts multiple crude sources and a vast refining industry capable of processing diverse grades. It already imports oil from the Middle East and other areas.
Thus, if Russian supplies become unavailable due to US sanctions or tariffs, India has viable options.
Why could cutting Russian oil harm the West?
India’s involvement in the Russian oil trade transcends mere crude purchases for domestic use.
Indian refineries also convert Russian crude into petroleum products, including diesel, which are then exported to global markets.
This medium-heavy crude can be blended with lighter Gulf crude before processing in Indian facilities. The resulting refined products are marketable in places like Europe and the US.
This scenario presents an unintended consequence of Western sanctions.
If Indian and Chinese refiners drastically reduce their Russian crude purchases, Russia could lose significant buyers. However, global markets might also find themselves lacking a crucial source of crude and refined petroleum products.
The implications could be particularly severe for diesel.
Europe relies heavily on diesel for trucks, industrial operations, and various sectors of the economy. Chaudhuri pointed out that Europe is already evaluating the potential for a diesel shortage in winter if Russian crude and refining capabilities are removed from the global supply chain.
A disruption may therefore tighten fuel markets well beyond India.
This poses a central dilemma for Washington: the more it strives to erase Russian oil from global markets, the higher the risk of escalating energy costs for Western consumers and enterprises.
Why would US consumers feel the consequences?
The US stands as the world’s largest hydrocarbon producer, yet domestic output does not entirely shield American consumers from global oil market fluctuations.
Oil is traded within a global marketplace. If a substantial volume of crude is withdrawn from international supplies, prices can escalate universally, including in the US.
“Global oil prices are generally interlinked,” Chaudhuri remarked.
Diesel might pose an additional challenge.
Chaudhuri noted that US crude production leans towards lighter, sweeter crude, whereas the country lacks sufficient diesel production capacity to be completely insulated from global refined product markets.
A major disruption in Russian oil flows could consequently elevate diesel prices in the US as well.
For Washington, this creates a complex trade-off. An initiative intended to tighten pressure on Russia could inadvertently escalate fuel costs for American consumers.
Could the tariff serve as leverage in India-US trade negotiations?
The Russian oil matter may also enter the broader context of the India-US trade dialogue.
India and the US have been in discussions regarding a trade agreement, with differing views on tariffs and market access complicating negotiations. Chaudhuri believes Washington might leverage the Russian oil situation.
“Yes, would America potentially use this as part of the FTA? I think that is perfectly plausible,” he asserted.
If India seeks relief from punitive measures related to Russian oil purchases, Washington could request concessions on other trade matters.
However, economic risks might limit how forcefully the US engages the threat.
If restrictions lead to a sharp decline in Russian oil flows and a spike in global crude and diesel prices, the resulting rise in fuel costs could impact the US economy as well.
Why might India receive an exemption?
Historically, India has been granted exemptions from US pressure regarding Russian oil, according to Chaudhuri.
One factor could be the potential repercussions on global prices. If Russian oil vanishes from the market while other supply chains are already strained, a significant drop in available crude could sharply drive prices higher.
Such an escalation would not only affect India but also US consumers and enterprises.
The timing is also critical. If measures that substantially raise petrol and diesel prices are imposed close to the US midterm elections in November, elevated fuel costs could become a politically charged issue for the White House.
Chaudhuri believes this could incentivize Washington to avoid actions that result in a drastic hike in American fuel prices.
This scenario provides India with room to negotiate an exemption as the legislation progresses through Congress.
What are the next steps?
The Senate vote does not equate to the implementation of a 100% tariff on India.
The bill still requires passage in the House and the president’s signature before the proposed mechanism can advance towards implementation.
This timeframe grants India the opportunity to evaluate alternative crude sources, modify its refining approach, and engage in discussions with Washington.
For US policymakers, this period offers a chance to assess the potential pressure on Russia against the risk of heightened oil and diesel prices domestically and in allied markets.
Who stands to lose the most?
India faces the immediate threat of increased crude procurement costs.
Transitioning away from discounted Russian oil could diminish the edge Indian refiners have held since the onset of the Ukraine conflict. Variations in crude quality, freight costs, and refining economics may also challenge margins.
Nevertheless, India has viable alternatives. Its refining infrastructure is not dependent on Russian crude, and it can adjust its sourcing when necessary.
The larger uncertainty lies in what happens to the global market if India and China significantly reduce their Russian oil imports.
Russia could lose essential buyers and encounter heightened challenges in selling its crude. Yet, global markets might also suffer a considerable volume loss of crude and refined petroleum products.
This could drive up oil and diesel prices in Europe and the US.
The outcome presents a challenging trade-off for Washington: a strategy aimed at sanctioning Russia and pressuring its prominent buyers may heighten energy costs for both the US and its allies.
For India, the threat of a 100% tariff is concerning, but it isn’t a matter of lacking alternatives. The ultimate impact will hinge on the progress of the bill in Congress, whether India secures an exemption, and, most critically, how global oil prices react to any disruptions in Russian supplies.
