How G7 oil price cap, deep discounts on Russian crude will benefit India

In what is good news for India’s current account deficit, India has reportedly been assured that it will keep receiving cheaper Russian crude. This, even as the Group of Seven (G7) price cap on Russian crude oil enters into force as of December 5.  

According to a Business Standard report, Indian government officials have been assured by the Russians of “uninterrupted crude supplies at the existing rates for the time being.”

What proportion of India’s oil imports are from Russia?

According to the report, 24.8% of India's crude oil imports came from Russia in the April-September period. This is up from just 0.2% of the total crude import volume before Russia invaded Ukraine in February. 

This was ahead of the United Arab Emirates’ 19.5% and Iraq’s 7.16%. India imports nearly 85% of its fuel requirement.

By how much is Russian crude discounted over crude from other countries?

The average discounts remain as high as 40% on Urals, compared to the benchmark Brent crude prices, international media reported last week from Moscow.

After shrinking for a few months from May, the level of discount has remained fairly high in recent months, the news report added. 

Are any other suppliers undercutting Russia?

Yes. According to the report, India’s largest historical oil supplier — Iraq — had undercut Russia beginning late June, by supplying a range of crudes that on average cost $9 per barrel less than Russian oil.

The extremely price-sensitive market had, therefore, shifted heavily in favour of Iraq.

But Russia began offering more discounts immediately afterwards, the report went on to say, citing a government official. 

So, what really is the price cap plan?

After months of wrangling between the G7 nations, namely Canada, France, Germany, Italy, Japan, the UK, and the US, along with the European Union (EU) and Australia, the price cap plan comes into effect on December 5. It will be implemented concurrently with a separate ban on Russian seaborne crude shipments by EU nations.

The Western allies hope to financially squeeze Moscow, which has continued to benefit from soaring energy prices and severed its means of financing the invasion of Ukraine. A further ban on refined products will apply from February 5, 2023, the EU has said.

India, being the second-largest oil importer globally, has been requested multiple times to join the price cap, especially by the US. However, Washington DC had consistently taken a soft tone on the matter. In November, US Secretary of the Treasury Janet Yellen said discounted Russian oil makes economic and geopolitical sense for India and the US was keen to see India benefit.

However, according to a report by The Press Trust of India, she added that New Delhi was free to continue buying oil from Russia as long as it doesn’t use Western financial services like insurance, shipping, and banking.

How exactly does a lower price cap help India?

India imports more than 70% of its energy needs, for which it pays in US dollars. A lower crude price would mean that India stands to gain as its dollar outgo would be lower than if it had to pay more. This helps the country’s current account deficit, which remains in check.