Russia’s energy exports to India have been growing since 2022. Facing western sanctions on account of its invasion of Ukraine, Russia found India to be a large and credible market alternative for its crude oil and offered to sell them at discounted prices. New Delhi seized the opportunity and within a year, it gradually became one of the largest buyers of Russian oil. While India remains optimistic about its energy imports from Russia, its continued patronage in the near future remains uncertain due to sanctions and prevailing fluctuations in the energy market. At this juncture, India’s experience trading with Iran comes as a learning curve.
Like Russia, once upon a time Iran too was a large oil supplier for India. Against the backdrop of western sanctions imposed since the 1979 Iranian revolution, Iran used to import over $10 billion of oil annually to India and was one of India’s largest oil suppliers up until 2019, when India pulled the plug and stopped buying oil from Iran after a US sanctions waiver expired. India which is known for strictly maintaining its strategic autonomy against strong western persuasion was forced to compromise its interests, eventually leading to Iran’s disappearance from India’s energy basket.
The worry is whether Russia will go down Iran’s path while trading with India. The answer lies in the comparative trends observed in India’s bilateral oil trade with Iran and Russia trade.
First, discounts feature as the main force behind shaping India’s oil trade with Iran and Russia. Earlier, Iran too had offered to sell crude oil to India at discounted prices, which gradually provided an impetus for the country to increase Iranian oil imports. India’s consumption of Russian oil was also maximized only after Moscow extended discounts. Russia’s fossil fuel imports to India in 2021 were barely worth $5 billion, but in 2022 after providing price discounts of $30-$35 per barrel, it was selling crude oil worth $34.6 billion– almost seven times what it sold the previous year. The conversion rate is staggering and highlights the impact fuel price discounts have on India’s growing energy needs.
Second, sanctions have been a common background feature noticed in India’s trade with Iran and Russia. Bilateral trade with a heavily sanctioned Iran was an uphill task for India even with a temporary relaxation on sanctions provided by the Iran nuclear deal in 2015, and encountered significant problems in the settlement of payments and shipping logistics– the same way as it faces with Russia. today. Though India tried its best to negotiate with Washington on extending the sanctions waiver for continuing to buy Iranian oil, the then United States (US) administration under Donald Trump was aggressive in its stance against Iran and was not open to providing further concessions to India any longer. The US even went to the extent of sanctioning an Indian petrochemical company for trading with Iran post the expiry of the sanction’s waiver.
Third, the absence of a robust non-western financial system for settling payments is another common hurdle observed by India in Iran as well as Russia. In the backdrop of financial restrictions imposed on Iran and Russia on the usage of the US dollar and suspension from the SWIFT international bank messaging network, payments to and from Russia became difficult, and hence India decided to experiment with local currency payment settlement systems such as the rupee-rouble and rupee-rial exchange via special vostro accounts in corresponding banks. However, operational banking issues, such as a lack of transparency regarding repatriation, insufficient currency reserves, additional handling expenses, and limited opportunities for surplus investment, resulted in the system’s collapse in Iran and hindered its successful implementation in Russia’s case as well.
Without a doubt, one can plausibly say that western actions against Russia are right from its playbook time-tested in Iran. India’s topsy-turvy experience trading with Iran is a reality check for Russia. Though India’s multidimensional strategic relationship with Russia is stronger and deeper than its relations with Iran, its actions are not entirely fool-proof against western overtures as noticed before. India may be effective enough to strike a bargain with the Western world today and buy cheap Russian oil, but that does not guarantee the West against taking action in the future, especially in the era of punitive tools such as the Countering America’s Adversaries Through Sanctions Act (CAATSA).
At the same time, India’s oil import from Russia cannot be overstated to be a longstanding one, instead can only be viewed as a price-sensitive market choice. From a realist view, India’s decision to buy crude oil from Iran and Russia was not because of valuing its relationship to help a sanction-hit country, but rather for the discounts they offered. Price is key for India to continue buying Russian oil and will be influenced by a multitude of factors other than discounts such as the G7 price cap, rising Chinese demand for Russian oil, Russian crude oil production cuts, and pricing arrangements such as free-on -board basis– shipping and other costs such as insurance borne by the buyer from the origin, or delivered ex-ship basis– all costs till delivery at specified location borne by the seller.
That being said, if India wishes to capitalize and continue importing Russian oil, its first and foremost priority should be to insulate itself from sanction-induced risks. From Iran’s instance, India should understand that sanctions are not going to vanish anytime soon, and without an exhaustive payment system that bypasses West-controlled financial infrastructure such as the SWIFT bank messaging network, Indian banks will always remain in the shadows of fear and uncertainty. while transacting with Russia. This is where India and Russia need to think out of the box and make the rupee-rouble system deliver. The resilience of such a payment system will determine the future of India-Russia trade.
This article is authored by KA Dhananjay, foreign policy researcher and incoming Master’s student in diplomacy and global governance, Brussels School of Governance.