ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 18th June. Click Here for more information.
Contents
News: The European Union’s (EU’s) announcement of a joint decision to phase out imports of Russian crude oil has, together with some other developments, shaken up oil markets.
This is the sixth such package of sanctions on entities linked to the Russian Federation by the countries of the EU.
Earlier sanctions have benefitted India, but it should be cautious of its Russian oil purchases.
What do the latest sanctions entail?
It would forbid the purchase of seaborne crude oil from Russia in six months and of refined products in eight months.
There will also be a ban on insuring Russian oil shipments to third countries such as India.
Both these measures are, however, considerably less stringent than earlier proposed because of strong objections from within the bloc.
The Hungarian government, the most Moscow-friendly in the EU, demanded that pipeline oil be excluded from any sanctions. Also, the countries dependent on pipeline oil be allowed to substitute seaborne deliveries of oil if the pipelines were interrupted.
And Greece, famously home to shipping tycoons, demanded that an earlier ban on Russian oil being carried on European hulls be rescinded.
What can be the potential impact of these sanctions?
There are multiple impacts of this EU agreement on the broader oil market and on India in particular.
The initial impact on crude oil prices was to cause an immediate appreciation.
The absence of a ban on pipeline oil means that the lasting impact on the Russian oil economy has been minimised since shipments can be diverted elsewhere, including to Indian and Chinese refineries.
The insurance ban might be more difficult to evade, and might raise logistics prices noticeably.
The Saudi alternative: However, the oil market has multiple other drivers. Since that initial appreciation, prices have trended downwards, driven especially by reports of a breakdown of internal cohesion at “OPEC plus”. The grouping adds Russia and some other large producers to the OPEC. If Russia leaves or is expelled from OPEC Plus, then Saudi Arabia might start pumping out more barrels than are allowed under the current OPEC Plus agreement.
How have the earlier sanctions benefitted India?
India has been one of the beneficiaries of the Western sanctions on Russian hydrocarbons, picking up oil shipments at an over 30% discount.
Some estimates suggest that 11-15% of Russia’s oil sales are going to India. According to some global energy analyst reports, the shipping data suggests that shipments of Urals crude to India have gone up to 900,000 barrels a day this month from just 33,000 barrels a day in February.
Way forward
Bargain-hunting by Indian refineries is a way to ensure that the overall spike in oil prices is not carried through to Indian refiners’ margins, or to the cost of fuel domestically.
Still, there is also a danger if India’s share in Russian exports rises much higher.
Secondary sanctions might still be a distant proposition, but there is a clear political downside risk to the refiners upping their purchases of Russian oil further — especially those that are state-owned.
Source: This post is based on the article “Another sanctions package” published in Business Standard on 1st June 22.
