India’s dependence on discounted Russian crude is under threat, as sweeping U.S. sanctions against Russia’s energy sector and oil transport operators are poised to disrupt supply chains and potentially jolt the economy. The implications could be far-reaching for Asia’s third-largest economy, which is heavily reliant on affordable energy imports to fuel its growth.
A Looming Oil Shock
“India will be more affected than China by sanctions, since India imports a much greater amount of its oil from Russia than China,” said Bob McNally, president of Rapidan Energy Group. This puts India at the center of a potential oil shock that could elevate inflation and strain its economy.
Last Friday, the U.S. Treasury announced sanctions targeting two major Russian oil producers and 183 vessels—primarily tankers transporting Russian crude. These sanctions, described by BNP Paribas’ senior commodities strategist Aldo Spanier as “deeper and broader than foreseen by markets,” are expected to amplify disruptions significantly. Among the newly sanctioned vessels, 75 had been supplying Russian oil to India.
The Fallout for India
India imported 88% of its oil needs between April and November 2024, with around 40% of those imports coming from Russia, according to trade intelligence firm Kpler. This marks a stark contrast from 2021 when Russian oil accounted for just 12% of India’s imports. The shift was fueled by Western sanctions on Russia following the Ukraine war, which drove down Russian oil prices and allowed India to seize the opportunity.
“If India were to fully comply with U.S. sanctions, we could see a sharp decline in Russian crude arrivals in February and potentially March,” said Muyu Xu, senior oil analyst at Kpler. The potential supply disruption could be as high as 500,000 barrels per day, according to Rystad Energy’s senior analyst Viktor Kurilov.
What are the Alternatives?
While India may eventually find alternative suppliers in the Middle East, it will come at a cost. Brent crude prices surged to a five-month high of $80 per barrel following the announcement of sanctions, and Middle Eastern crude prices are also climbing.
“Depending on how quickly Russia resolves its logistical challenges and how cooperative India and China remain with the sanctions, oil prices could spike for a few weeks,” Xu added.
Adding to the complexity, global oil markets are bracing for a potential double whammy: heightened sanctions on Iran as Donald Trump’s inauguration nears. Goldman Sachs predicts that if Iranian crude is further restricted, Brent prices could soar to $90 per barrel.
Economic Strain on India
The Indian economy is particularly vulnerable to fluctuations in oil prices. “High oil prices, if passed to consumers, could further hurt their purchasing power at a time when income and GDP growth have slowed,” said Dhiraj Nim, an economist at ANZ.
According to a 2019 Reserve Bank of India analysis, every $10 per barrel rise in oil prices could lead to a 0.4% increase in headline inflation. Producers may hesitate to pass on rising costs to consumers, potentially eroding profits, while government intervention to absorb costs could strain public finances.
A Perfect Storm of Challenges
Compounding the situation, India’s rupee recently hit a record low due to a stronger U.S. dollar and foreign investor sell-offs. Oil tanker rates have also risen, further inflating import costs. Andy Lipow, president of energy consultancy Lipow Oil Associates, emphasized that India will not only pay more for oil but also face higher delivery costs, magnifying the economic impact.
Historically, high fuel prices have sparked widespread unrest in India. In 2018, surging petrol and diesel prices led to nationwide protests, shutting down businesses and schools in several regions. The specter of similar unrest looms as oil prices threaten to climb once again.
The Road Ahead
As India braces for these challenges, its ability to navigate the energy crisis will be tested. With global oil markets tightening and alternatives coming at a higher cost, the era of cheap Russian oil may be ending, leaving India to grapple with the economic fallout.
For a nation poised to surpass China as the world’s largest oil consumer by 2025, accounting for 25% of global oil consumption growth, this disruption could not come at a worse time. The next few months will reveal whether India can secure affordable energy sources or face the consequences of an oil shock that could ripple through its economy.
