Other BriefingsIndia’s Position on Russian Oil: No to Price Cap, Cooperation in Leasing and Construction of Large Crude Carriers
India recently decided against the price cap of US$60 per barrel imposed by the G7 nations, European Union (EU), and Australia on Russian oil. It has defended this position as the pursuit of a balanced and independent foreign policy in the public interest. Russia has welcomed the move and in turn extended cooperation for leasing and construction of large crude carrier ships to overcome the ban on insurance services and tanker chartering in the EU and Britain so that India can continue buying discounted oil.
Despite mounting international challenges, India has increasingly pursued a very balanced and independent foreign policy approach towards Russia. Consequently, India abstained from acting on various sanctions imposed by western countries on Russia, including the most recent one on December 5, 2022, when G7 nations and their allies imposed a price cap on Russian oil.
New Delhi’s decision to not support the oil price cap has been hailed by Moscow.
Further, welcoming India’s decision, Russian Deputy Prime Minister Alexander Novak offered India cooperation on leasing and building large-capacity crude carriers as an insurance on Russian oil. Traditionally, India has been unable to procure large quantities of crude from Russia due to the lack of large capacity crude carriers. This also removes insurance liability on India as after price cap, most insurers have backed out from insuring Russian crude.
In 2021, bilateral trade between Russia and India increased by 46.5 percent, exceeding US$13.5 billion. From January to September 2022, this bilateral trade reached US$20.4 billion.
What is the price cap on Russian oil and which countries are implementing the sanction?
The G7 nations – the United States (US), Canada, France, Germany, Italy, Japan, and the United Kingdom (UK), the 27 member countries of the European Union (EU), and Australia recently agreed to a US$60 per barrel price cap on Russian seaborne crude oil, as part of their sanctions on Russia against its invasion of Ukraine.
The price ceiling does not apply to oil importers but rather to service businesses, such as tanker operators, marine insurers, etc., who will be unable to service the transportation of Russian oil if the contract price exceeds the ceiling of US$60 per barrel.
Additionally, an EU-wide blockade on imports of Russian offshore oil went into effect on December 5. Simultaneously, the UK is instituting a transitional period for oil loaded on ships before December 5. The validity period ends on January 19, 2023. This means that ships loaded with Russian oil before December 5, 2022 and unloaded at their destination before January 19, 2023 will not be subject to the price cap.
Leasing and construction of large ships a new area of India-Russia cooperation
Ever since the EU- and UK-led embargo for handling of Russian oil was announced, Russia extended its cooperation to India for leasing and construction of large ships to ensure that the country will not have to rely on European insurance services and the charter of tankers.
In recent years, Russia has explored the possibility of collaborating with India in the fields of inland waterways and civilian shipbuilding, including repairs, besides expediting maritime links through International North South Transport Corridor (INSTC) and Vladivostok-Chennai shipping links.
In September 2021, Russian shipyard Zvezda and the Indian public sector unit Mazagon Dock Limited signed a letter of intent to collaborate on the construction of commercial ships. The Zvezda facility manufactures even the most intricate tankers, such as the Aframax, which weigh approximately 1,200,000 DWT (dead weight tons).
It must be noted that in India, only the Cochin Shipyard builds these kinds of vessels, and till date has delivered two of the country’s largest double-hull Aframax tankers, each with a 95,000 DWT displacement.
In August 2022, Russia’s biggest shipbuilder United Shipbuilding Corporation (USC), that includes around 40 shipbuilding companies and organizations, announced “big plans” to set up a manufacturing hub in India under the Make in India initiative and was already considering two investment opportunities at the time. The locations of these investment have yet to be confirmed.
India-Russia partnership face continued geopolitical pressure
In the last few years, both countries have confronted geopolitical challenges while pursuing a strong bilateral partnership. These include western sanctions against Russia, Russia’s accelerated pivot towards China against the backdrop of India-China tensions, as well as the recent conflict between Russia and Ukraine.
However, despite these escalating challenges, India has continued to maintain an independent foreign policy stance with Russia. At present, the India-Russia partnership rests on arms as well as oil trade. Despite the increasing competition from US, France etc., Russia remains the most important weapons supplier to India, with Russian equipment accounting for a sizeable contribution in Indian armed forces.
In November 2021, Russia began supplying S-400 Triumph anti-aircraft missile systems to India, at a deal worth over US$ 5 billion. Further, agreement has been reached on contracts for the production and delivery of Russian AK203 assault rifles and Igla-S portable anti-aircraft systems to India.
The primary reason for Russia being the major participant in India’s defense infrastructure, apart from Soviet Union legacy, is that Russian weapons tend to be less expensive and more or less competitive with their Western equivalents and are available on more flexible payment terms. Moreover, Russia has also been supportive of technology transfer and licensing weapons production—a lucrative and beneficial prospect that interests India.
Russia an important oil supplier for India
Russia has emerged as one of the important oil suppliers for India. According to the statement issued by the Russian Foreign Ministry, Russian oil imports to India rose to 16.35 million tons in the first eight months of 2022.
Ever since the onset of Russia’s conflict with Ukraine in February 2022, it has been selling discounted oil, an opportunity which has been leveraged by both India and China to cut their bulky crude import bills.
India’s imports of Russian oil have risen from a very low base at the start of the year reaching a peak in June and July, and largely maintaining these levels through to November. Data suggests that from late November, there appears to have been a renewed surge in oil purchases by India. According to Matt Smith, an oil analyst at Kpler, this trend is likely a sign that “oil loadings have pivoted away from heading to EU 27 countries and are heading to India instead”. In fact, experts suggest that if oil supplies continue at the same levels in December, Russia could become India’ single largest oil supplier.
Exploring alternate payment channels
Furthermore, while India and Russia have been exploring alternate payments channels for its bilateral trade payments, recent reports indicate that US dollar continues to remain the mainstay of payment for Russian oil. This is partly because of India’s reluctance to switch to the euro or the United Arab Emirates’ dirham (Moscow’s preferred alternatives), and Russia’s reluctance to shift to Indian rupee due to the expanding trade imbalance between the two countries.
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