Indian oil benefit from Russia overhyped: Actual gains just $2.5 billion

India's purchase of discounted Russian oil, which surged after the Ukraine war, has been under intense scrutiny, with some US officials accusing New Delhi of profiteering. However, a recent report from brokerage CLSA has debunked the exaggerated claims, revealing that India's actual gain from Russian oil imports is just USD 2.5 billion per year, a fraction of the previously speculated USD 10-25 billion range.

The CLSA report challenges the numbers often cited, stating that India's benefits from Russian crude are significantly smaller than previously believed. According to the brokerage, the net annual benefit from Russian oil imports amounts to just 0.6 bps of India's GDP. "The benefit from Russian oil imports is way less than exaggerated media numbers," the report states.

India's oil imports from Russia surged dramatically from less than 1% of total crude oil imports to nearly 40% following Russia's invasion of Ukraine. This spike was driven by steep discounts offered by Russia after Western countries began imposing sanctions. Despite the rise in imports, India maintains that its actions are legal, as no international sanctions prohibit the purchase of Russian crude.

The Trump administration has criticised India for what it called "profiteering" by buying discounted Russian oil and then exporting refined products to Europe. However, India has consistently pointed out that there are no sanctions on Russian crude oil itself, only on refined oil products. The European Union imposed a ban on Russian oil derivatives recently, but India's purchases have remained within the bounds of international trade laws.

CLSA notes that while the headline price discount on Russian crude, currently capped at USD 60 per barrel, may seem significant, the actual net gain for India is much smaller when considering factors such as shipping, insurance, and the cost of landing the oil in India. The discount on Russian oil, which averaged USD 8.5 per barrel in FY24, has now fallen to around USD 1.5 per barrel in recent months.

"The discount on Russian crude appears large due to the USD 60 price cap, particularly when Brent crude prices rise above USD 75 per barrel," CLSA explains. "However, the net benefit to Indian importers is far smaller, as there are several shipping and insurance-related restrictions for Russian crude. Therefore, Indian refiners import Russian crude on a cost, insurance, and freight (CIF) basis, increasing the landed price and reducing the visible discount."

Using an average discount of USD 4 per barrel, CLSA estimates the total annual advantage from Russian crude imports at just USD 2.5 billion for India in FY25-equivalent to only 0.6 bps of India's GDP. The discount has continued to decline, with the current discounts bringing the gains closer to USD 1 billion annually.

The CLSA report also underscores that any substantial benefit from Russian oil imports must be examined within the context of the broader energy market. Indian oil marketing companies (OMCs) have pointed out that the increased reliance on Russian crude, which is of inferior quality, requires refineries to buy higher quantities of more expensive, better-quality crude to balance their input. This makes it difficult to discern clear gains in the overall price of crude imported by India.

While India has secured affordable energy through Russian oil imports, the broader global implications are also critical. CLSA warns that if India halts its Russian oil imports, the global oil market could face significant disruptions. "Stopping Russian oil imports would force India to rely on limited alternatives, potentially driving global crude prices up to USD 90-100 per barrel, which could fuel inflation across the world," the report notes.

India's purchases of Russian crude have played a role in keeping global oil prices in check, especially amid rising demand and tight supply. With only a few buyers purchasing Russian crude, any interruption in India's imports could leave Russia struggling to find buyers for 1 million barrels per day, potentially driving oil prices even higher.

In conclusion, the CLSA report reiterates that India's oil imports from Russia are not the financial windfall some have suggested, but rather a pragmatic decision to secure energy supplies in a volatile market.