New Western sanctions: Curbs tighten tap, leave India with headroom to taper off Russia crude

Private sector refining giant Reliance Industries (RIL), which alone accounts for around half of India’s Russian oil imports and sources a bulk of its Russian oil purchases from Rosneft under term deal, could see a massive cut in its oil imports from Moscow.

RIL did not immediately respond to a request for comment.

Sources indicated that the company would be looking to attune its Russian oil imports with the view the Indian government takes on the issue. So far this year, Russian oil has accounted for over 35 per cent of India’s oil imports.

This move by the Trump administration — it had so far not imposed direct sanctions on Russian oil majors even as it pressured New Delhi to cut oil imports from Moscow — is being seen as a major escalation in its bid to force Russia’s hand into ending the war in Ukraine.

The sanctions effectively mean that companies and financial institutions doing transactions with the sanctioned entities run the risk of attracting secondary sanctions from Washington. Historically, India has avoided oil imports from countries like Iran and Venezuela, whose oil was sanctioned by the US.

Oil, Russia’s biggest source of revenue, is a lever that the Trump administration believes it can use to force Moscow to end the war in Ukraine. New Delhi is the second-largest buyer of its oil after Beijing, and is in the midst of sensitive trade pact negotiations with Washington. Trump has been pressuring India to stop Russian oil purchases, and slapped an extra 25 per cent tariff penalty on most Indian goods in August.

So far, India had shown no meaningful signs of buckling under US pressure on the issue. While there was a domestic trade-off at play – the prohibitive cost of sky-high US tariffs on India’s small and medium exporters versus the relatively lower savings accrued by large refiners buying discounted Russian crude – Trump’s public posturing made it difficult for India to cut back on Russian oil immediately even if it wanted to.

It was clear that India did not want to compromise on its strategic autonomy and was unwilling to be dictated to by the US on whom it should be doing business with, particularly when it came to Russia, an old and key strategic partner. The sanctions now offer India far more headroom to quickly taper off Russian crude, which would have otherwise been difficult under the current circumstance despite the diminishing economic tradeoff.

The discounts on Russian oil have contracted considerably from three years ago when India started lapping up Russian barrels, and the current oil price environment is also far more benign, which means that the loss of Russian barrels, while still a hit for Indian refiners, may not be too significant.

According to sources, given that a bulk of Russian oil was being imported by private sector refiners RIL and Nayara Energy (in which Rosneft is a part owner), the US had also separately initiated discussions with them on Russian oil.

On its part, the Indian government has consistently maintained that the country will buy oil from wherever it gets the best deal, as long as the oil is not under sanctions. There are no sanctions on Russian oil; it is only subject to a price cap imposed by the US and its allies that applies if Western shipping and insurance services are used for transporting the oil. But even though the American sanctions on Rosneft and Lukoil are not sanctions on Russian oil per se, they can really choke supplies to India since over two-thirds of India’s Russian oil imports come from these Russian energy majors, as per industry estimates. Rosneft and Lukoil together account for over half of Russia’s oil output and seaborne exports.

Vandana Hari, energy markets expert and founder of Singapore-based energy markets intelligence firm Vanda Insights, said, “This move is a game-changer. It effectively closes the door on Russian oil exports. Though the situation may evolve rapidly, Indian refiners have no option but to halt Russian purchases for now. The market has come up with workarounds to previous sanctions and designations, but that looks hard if not impossible this time around. Equally, President Trump is likely expecting and hoping that the move finally breaks the stubborn impasse in Ukraine peace efforts. If President Putin relents, we may see a quick de-escalation of the latest sanctions.”

Muyu Xu, senior crude oil analyst at global commodity markets data and analytics provider Kpler, said, “US sanctions targeting Rosneft and Lukoil, two key pillars of Russia’s oil sector, are poised to interrupt established export flows and send global crude markets into a recalibration phase. The two firms collectively contribute over 5 mbd (million barrels per day) in output and supply roughly 2 mbd of seaborne crude. Refiners in China, India, and Turkiye are conducting risk reviews, while spot demand for Middle Eastern and Atlantic Basin (crude oil) grades is expected to rise. With China and India together importing nearly 2.8 mbd of seaborne Russian crude, a seamless replacement appears challenging.”

There is some speculation that public sector refiners, which buy nearly all of their Russian oil from third-party traders and not directly from Russian oil companies, could still continue to engage in such trades as none of these third-party traders have been targetted by the sanctions. However, experts opine that even these trades are bound to see a significant hit in the near term, as there may be a general averseness to get involved in Russian oil trade for the time being.

“These are not your well-known trading companies, but the little-known intermediary outfits that have cropped up over the past three years. Theoretically, the Indian refiners could try, but I am not sure it will be worth the risk. These intermediaries may also lie low for the time being, as they will be on the US’ radar for secondary sanctions. Banks may also retreat from doing business with them,” said Hari.

When Russia invaded Ukraine in February 2022, Moscow’s share in New Delhi’s oil imports was less than 2 per cent. With much of the West snubbing Russian crude following the invasion, Russia began offering discounts on its oil to willing buyers. Indian refiners were quick to avail the opportunity, leading to Russia—earlier a peripheral supplier of oil to India—emerging as India’s biggest source of crude with a commanding market share, displacing the traditional West Asian suppliers.

And while discounts on Russian crude have narrowed considerably over time, even lower discount levels are lucrative for India, given that the country in the world’s third-largest importer of crude oil and depends on imports to meet around 88 per cent of its requirement. Replacing the massive volumes of Russian crude is no mean task, and is fraught with undesirable consequences for Indian refiners. The companies are expected to adopt a multi-regional approach, which would entail buying a lot more from India’s traditional oil suppliers in West Asia like Iraq, Saudi Arabia, and the UAE, while also increasing imports from other regions—West Africa, North America, and Latin America.

The oil markets appear to be taking Washington’s latest action and the potential loss of a large chunk of Russian oil supply seriously. Oil prices rose over 5 per cent following the announcement.

“The latest US sanctions on Russia’s largest oil producers represent a significant and unprecedented escalation in Washington’s pressure campaign against Moscow. The sharp rise in oil prices following the announcement underscores market fears that Russian crude exports—particularly to India, one of its key customers—could fall sharply. Combined with the recent wave of attacks on Russian oil infrastructure, these sanctions raise the prospect of major disruptions to Russian crude production and exports, heightening the risk of forced production shut-ins,” said Jorge Leon, head of geopolitical analysis at Rystad Energy.