By R. Sasankan
The Ukraine crisis has thrown up a number of challenges for emerging
markets like India: supply chain disruptions, the scary prospect of
runaway inflation, and a mad scramble to find quick-fix solutions to a
plethora of problems.
It has also presented a dilemma for the Narendra Modi government which
has tried to stay in neutral during this tense dispute between Russia
and Ukraine during which leaders around the world have come under
pressure to choose which side they wish to support. It is hard to
maintain a balancing act on a tripwire where a slight lurch in one
direction or the other could have serious repercussions on diplomatic
and economic relations with the rest of the world.
The Government of India – which has been wrestling with its own problems
in dealing with the surge in crude oil prices – stands on the brink of a
serious quandary as it considers an overture from the Russian regime in
the shape of an offer to supply price-discounted crude to India to help
it tide over a looming crisis. Petroleum minister Hardeep Singh Puri
and finance minister Nirmala Seetharaman had confirmed last week that
India had an offer from Russia and it was under consideration.
Immediately after, Indian PSUs such as IOC, BPCL and MRPL started buying
Russian crude which is available at a discounted price in the market.
This is not a special package designed for India, but normal buying in
the market.
The Russian offer is admittedly very tempting. India has a huge oil
import bill as it sources almost 85% of its energy needs from overseas
markets. The West has hit Russia with a number of economic sanctions –
but stopped short of banning imports of Russian crude. This is where
pragmatism takes over: Europe needs Russian oil and gas; and the US is
only too keenly aware that a clamp down on Russia oil will send prices
skyrocketing and have grave consequences for their economies which are
slowly limping out of the Covid-induced crisis.
In one sense, there is no real bar on India accepting price-discounted
crude from Russia. But any move for a special deal with Russia can send
out the wrong signals to the West which is already upset with India for
failing to take an unequivocal stand on the Russian aggression in
Ukraine. India could anger the West if it succumbs to the Russian
overture – and they could put the squeeze on India in some other area.
Global oil giant Shell found itself if a similar predicament recently:
it decided to pull out of Russia but then opted to purchase Russian
crude, which angered the west. To head off the possibility of concerted
action from these nations, the company said it would offer any profit
that it made on the oil deals with Russia to Ukraine.
India needs to consider the Russian offer carefully but ought not opt
for the discounted crude package until the Ukraine crisis has completely
blown over. It can opt to buy crude from the international markets
where the prices have fallen to around $ 100 a barrel after rising
alarmingly to over $ 140 at one stage.
The Modi government handled the initial phase of the Ukraine crisis
remarkably well. It refused to condemn the Russian invasion of Ukraine,
which was perfectly in tune with India’s national interests. Ukraine is
strategically very important for Russia’s security. Russia has good
reason to remain alert to what happens in Ukraine just as India feels
the need to closely monitor developments in its neighbourhood.
The erstwhile Soviet Union had strongly backed India when it decided to
support the liberation struggle in Bangladesh and the subsequent war
with Pakistan, especially when the US government led by President Nixon
tried to frighten India by sending its 7th fleet to the Indian Ocean.
India still depends heavily on Russia for its defence equipment. This is
precisely why even President Joe Biden opted not to chide India for its
refusal to condemn the Russian invasion of Ukraine.
But that is where the US will draw the line. The US will be hugely
miffed if India accepts the specially discounted crude package from
Russia. Ever one knows that crude oil is the Achilles heel of the Indian
economy. However, the West will be less than sympathetic if it buckles
and accepts Russia’s offer of cheap crude.
“India is in a very difficult situation. It cannot afford any misstep.
This is not the time to worry about small gains in the oil and gas
sector. The stakes are much higher. Israel is proactively involved in a
shuttle diplomacy between Moscow and Berlin. India's interests lie in
quickly resolving the dispute,” said an acknowledged expert. He believes
the West can retaliate in several ways if India wavers now.
“I believe India should not jeopardise its carefully-balanced diplomatic
posturing now by opting for discounted crude from Russia. It would also
be prudent to avoid third party purchases of crude from countries like
Iran, assuming that the US suddenly decides to lift the sanctions
against Tehran”,said an acknowledged expert.
There is a lot at stake for India. The Modi government should instead
focus its attention on trying to resolve the conflict instead of looking
to derive benefits from it.
Russia ranks among the top three crude oil producers of the world. But
its contribution to India’s crude requirement has been marginal,
ostensibly because of the high cost involved in transporting crude all
the way from Russian ports. This argument is somewhat puerile: the
‘distance’ argument is posited by people who either have no
understanding of the manner in which oil is traded around the world or
have a sinister motive to persist with oil purchases from the Gulf
nations.
Technically, India could work with oil and LNG importers from Japan and
South Korea and ensure that shipments from East Coast of Russia
purchased by India are delivered to Japan and South Korea. As a quid pro
quo, Japanese and South Korean purchases from the Middle East could be
delivered to the Indian West Coast or even the Indian East Coast. India,
South Korea and Japan can all benefit this way. This sort of swapping
arrangement is quite common in the oil business.
So, why is the mischievous argument being made at all? The sad truth is
that crude oil import into India is enmeshed in all sorts of
shenanigans. Right from the 1970s, crude imports have been seen as a
source of funds for the ruling political party. Kickbacks in these deals
are common and the beneficiaries of the payoffs have included certain
ministers and senior bureaucrats of the state-owned oil companies. The
big bucks that these worthies received provided the necessary grease to
keep this sinister ploy in operation over the years.
The quantum of kickbacks is quite high in LNG deals. The Soviet Union
was not good at the art of bribing. The Asian premium that the Middle
Eastern suppliers charged from India is believed to stem from this
graft-ridden culture.
These are some of the reasons why Russia has never been seen as anything more than a bit player in crude oil supplies to India.
The Indian government needs to seriously reconsider its crude
procurement strategy once the Ukraine crisis ends. India can -- and
should -- turn to Russia as a major source of supply in the post-Ukraine
crude market. Indian Oil Corporation started buying crude from Russia
only a couple of years ago and the quantity has been limited to 2
million tonnes per annum. Russian crude, which has been found to be
suitable for IOC’s refineries, is compatible with other refineries as
well. In fact, PSUs such as BPCL and HPCL have been making market
purchases of Russian crude as part of their normal trade.
The deep discount on Russian crude will only be a short-term
arrangement, prompted by the situation in which Moscow finds itself as a
result of the tense stand-off on Ukraine and the resultant economic
sanctions. A long-term arrangement can be worked out after the
international situation normalises.
Meanwhile, the political leadership in the ministry of petroleum and
natural gas, which is relatively new and credited with a clean image,
should initiate measures to ensure that the kickback culture that
throttles crude oil imports in this country is totally eliminated.
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