The other side of Russia’s new sanctions: reviving Iranian oil exports to India

According to Energy Press; The imposition of new US sanctions on Russian oil marks the beginning of a challenging phase for India, as the country, as an economic powerhouse, relies heavily on imported energy resources. India’s dependence on foreign oil, as Asia’s third-largest economy and one of the fastest growing globally, makes it vulnerable to external shocks. Sanctions targeting Russian oil producers and shippers have the potential to disrupt energy stability, fuel inflation and create macroeconomic imbalances. These developments will have far-reaching implications not only for the Indian economy but also for the global energy market.
The impact of the Russian oil sanctions on India
India imports 88% of its crude oil, with nearly 40% coming from Russia. This dependence represents a sharp increase from just 12% in 2021, as India benefited from deep tariff concessions offered by Moscow in the wake of Western sanctions imposed after Russia invaded Ukraine. These favorable pricing conditions have allowed India to manage rising domestic demand and provide relatively low fuel prices to its consumers. But this reliance on discounted Russian oil has exposed India to geopolitical risks, as current sanctions strangle a significant portion of its supply.
Under the new restrictions, nearly a third of India’s Russian oil imports – equivalent to about 500,000 barrels per day – are at risk. The sanctions are already affecting global oil markets, with Brent crude prices on the rise. For India, a $10 increase in oil prices translates into a 0.4 percent increase in inflation, putting significant pressure on consumer purchasing power and corporate profit margins.
This puts the government in a difficult position, as continued subsidies may temporarily protect consumers and maintain political stability, but this approach increases the fiscal deficit and adds to India’s sizeable public debt. On the other hand, shifting costs to businesses could stifle private sector growth, burden consumers, and cause widespread public discontent. Fuel price hikes have historically been a trigger for social unrest in India. For example, in 2018, a similar scenario led to widespread protests against record fuel prices, and the current situation could trigger a repeat of such unrest.
India’s vulnerability has been exacerbated by the weakening rupee, which has weakened against the US dollar in recent months. The weaker currency increases the cost of imports and exacerbates the financial pressure of rising oil prices. In addition, shipping sanctions imposed on 183 ships involved in transporting Russian crude are expected to increase shipping costs and oil prices for import-dependent countries like India. These combined factors are intensifying the economic and social pressures on the country.
In response to the looming crisis, the Indian government has been exploring alternative sources of crude oil, particularly from the Middle East. This strategy is likely to mitigate some of the immediate risks, but it is unlikely to match the cost advantages offered by discounted Russian oil. Also, switching to alternative suppliers would require significant adjustments to logistical and infrastructure frameworks that could be time-consuming and incur significant costs. Unlike Russia, Middle Eastern suppliers are less willing to offer long-term price concessions, limiting India’s flexibility to negotiate more favorable terms.
The crisis has also underscored India’s precarious position in the global geopolitical landscape. India is walking a tightrope as it seeks to maintain strong ties with both the United States and Russia. Its strategic partnership with the United States requires compliance with sanctions, while its long-standing energy relationship with Russia provides the volume of oil needed to meet domestic demand at competitive prices.
The potential implications of an oil shock go beyond energy and the economy to affect the Indian government’s more strategic ambitions. As the world’s most populous country and a rapidly industrializing economy, India aspires to play a leading role on the global stage. However, its dependence on imported energy undermines these ambitions by exposing the economy to external vulnerabilities. The current crisis is a reminder that energy security is essential for economic sovereignty and geopolitical influence.
Delhi’s Multifaceted Measures
In the short term, India may adopt a range of temporary measures, including subsidies, tax cuts, and strategic oil reserves, to weather the crisis. However, these measures will only provide temporary impact. To achieve long-term resilience, India needs to accelerate its efforts to diversify its energy sources and invest in renewable energy infrastructure. Expanding domestic oil and gas production could also help reduce dependence on imports, although this will require significant investment and policy support. Additionally, the government should consider regional energy partnerships to ensure more sustainable supply chains.