To Buy Or Not To Buy?

Introduction

Oil: The one thing that fuels and greases the global economic machine, the black gold for which countries will go to war, claiming to uncover deadly weaponry (you know who) and yet again a centrepiece in igniting a debate over India`s bilateral relations with Russia. 

There has been growing pressure on India from the West to condemn formally and explicitly, (or rather to pick a side) Putin`s ideological war on Ukraine. India however has stuck to its roots of non-alignment, testament to which has been its 11 abstentions at UN motions that are critical of the invasion. Further, much to the Wild Wild West`s dismay, India continues to purchase arms and oil from Russia in large quantities.

While casualties rise as the war prolongs and countries opting to choose peace to resolve the conflict seem bleak, the question posed to Indian diplomats remains the same -Should India continue buying Oil from Russia while its onslaught on Ukraine continues?

The answer is yes: Whatever it takes to hold our fort and feed our people. This article seeks to examine and critically assess reasons which justify why continuing to acquire oil from Russia is in India's best interests.

How cheap is Russian oil and why is it that cheap?

The oil market is highly volatile and the prices are puppets at the hands of rich oil-producing countries like the ones that make up the OPEC cartel. The reason quite simply being these countries control more than 80% of the world’s supply of oil and natural gas refineries which are disproportionate to the inflated demand for energy across the world. Therefore, these nations now seek to seize the opportunity to maintain high global prices by controlling their output.

Russia despite being the 6^th largest producer of oil in this market, is offering its black jelly at cheap and discounted rates to the world. This is for a couple of reasons.

Firstly, major G-7 economies backed by the EU and Australia, plan to cap the price and imports of Russian oil through sanctions and trade barriers like quotas.

Secondly, countries are increasingly looking to alternate sources for their oil owing to international pressure and are willing to go to the extent of suspending pipeline projects with Russia as Germany did with the Nord 2 pipeline.

In this context, the onus is on Russia to find new buyers and retain as many of its old buyers as possible. Thus, Russia offers to pay transport and insurance costs while offering steep discounts and innovative modes of payment which reduce to a great extent taxes and conversion charges to be paid.

This is an important initiative for two reasons:

1.     Factors that make oil immensely expensive to countries like India are not just the price of oil per barrel itself, rather it is overhead costs like shipping or flying in oil and losses incurred due to accidental fires and spills.  

2.     Trade has become harder since major Russian banks have been cut off from the SWIFT messaging system used for international transactions and American sanctions have largely prohibited the use of dollars. Hence its offer to trade in systems exclusive to each of its buyers comparatively eases the costs of trade. For eg: Indian operations of several large Russian banks act as a conduit for transactions, by opening rupee accounts for Russian exporters.

This means that Russia still manages to continue selling its oil and natural gas to countries through these incentives and thus continue to earn a profit while preventing its supply from being static or diluted.

Having established that Russian oil is cheap and profitable, why should India continue buying Russian oil?

Economic Perspective

As the world`s third-largest importer of oil, India is uniquely vulnerable to fluctuations in oil prices. According to Nomura analysts, every $1 increase in the price of oil boosts India's import cost by $2.1 billion. This coupled with the growing inflationary pressure in the Indian economy leading to increasing prices of essential goods and services like groceries and conveyance is a looming threat to the livelihood of the world`s largest population.  Why is this true? Two reasons:

1.     India is a developing economy wherein most of its industries are run on petroleum products and there is a lack of shift to usage of renewable sources of energy like electric cars or large-scale use of solar panels. Therefore, its industries and even agriculture to a good degree (need for petrol/diesel for tractors and harvesters) depend on a cheap supply of oil. In the absence of which:

a.     costs of production increase owing to a lesser supply of oil or

b.     product/ion levels go down in industries that are not able to adapt to the change in supply.

2.     This has a domino effect on prices and employment. Since at the end of the day everything is directly or indirectly dependent on oil, increasing costs of production or costs of petrol could mean higher cab fares or higher transportation costs which further accelerate the price of essential goods. This adds to the existing inflationary pressure on the status quo.

Thus, in the event of a worldwide energy crisis, India may take advantage of significant Russian discounts on its oil, particularly when for some reason the government is unwilling to cut taxes on petrol prices which soar as high as Rs 100 per litre. This is precisely why after the Ukraine war India`s imports of Russian oil increased as it would aid the central bank`s efforts to tame inflation and aid fiscal measures to reduce the cost of fuel.

Moral/Ethical Justification

The arguments against India purchasing Russian oil are premised on moral and ethical concerns of India refusing to condemn Russian actions in Ukraine and in addition, somehow indirectly aiding it through its purchases.

There are a couple of responses to this:

1.     Though we live in a highly globalised world, countries exist individually and their obligations extend first, to their own citizens. It is their citizens who pay the state a huge amount in taxes, vote in representatives and accept its moral coercive power to regulate their behaviour and imprison them. This is based on the principles of social contract and reciprocity. So, in return, the Indian state and its representatives need to do their duty and if someone offers a way out to feed its huge mass of citizens and relax pressures on their economy there is no way in hell they are passing up on that opportunity.

2.     As Dr Jaishankar said, the West needs to grow out of this mindset that “Europe`s problems are the world`s problems but the world`s problems aren’t any of Europe`s problems.” Just observe the hypocrisy of these countries here. They themselves have purchased oil from Russia even after it invaded Crimea in 2014 and in fact, went on to build pipelines and strategic partnerships along these lines. Further, India has made the same promises of diplomatic talks, talking to Putin, sending resources to Ukraine, and not overtly supporting Russia in the international forum. These are the exact same things the West has done when it came to China-Taiwan, Israel-Palestine, and the proxy war in Yemen because of its strategic ties with Israel. Taiwan and Saudi Arabia mattered more to its self-interests. 

What are the alternatives and why are they worse? 

If India is not buying oil from Russia who else could we look towards?

1.     OPEC Countries

a.     Oil prices set by OPEC are almost always hella expensive and sharky since they control 80% of the oil supply. A barrel of oil costs $100 as opposed to Russia`s discounted $49.7 which costs 50% less per barrel. Such high rates would most certainly increase the trade deficit and reduce foreign reserves and thereby increasing the overall price level.

b.     Further if the purpose behind boycotting Russian oil is not to aid war crimes and human rights abuses then buying oil from countries like Saudi Arabia and Qatar in increasing quantities while they are making Yemeni citizens starve through proxy wars and abuse workers for building stadiums respectively, is a counterproductive metric

2.     The West:

a.     Look EU and the West are not major exporters of oil and seek to use most of the oil they generate to satisfy their domestic needs. So, the oil we get from them will be disproportionate to current domestic demand. Their oil at around $80 is still far more expensive than that of Russia.

b.     In addition, until recently has been buying oil in large quantities from Russia. And the Nord Pipelines are still in place.   

3.     Self Sufficiency?

a.     It will be highly costly for India to even try to be self-sufficient because we quite simply do not have sufficient oil and natural gas reserves to exploit. It also lacks the capital post covid to step up its strategic petroleum reserve facilities that are located only in 3 places; Vishakhapatnam, Mangaluru and Padur. This in and of itself costs Rs. 210 crore and six years to set up.

b.     Even if somehow petroleum is exploited from its reserves, India lacks the storage capacity to store those products and distribute them across the country.

How would Russia react if India stops buying its oil?

Why do we necessarily risk antagonising Russia?

Granted, Russia is not a benevolent actor but is rather one driven by vicious self-interests and radical right-wing ideologies. But that is also precisely why India should be very careful in deciding if it will boycott Russian oil. This is because oil is not just a commodity which we purchase rather it is a key diplomatic tool to maintain and further strengthen Russian support to India.

If India decides to boycott Russian oil or cap its purchases because of the invasion, then it necessarily must take a hard-line stance against Russian aggression in Ukraine and Europe as a whole. This includes voting for resolutions which seek to hold Russia accountable in the UN and disengage from Russia diplomatically at least temporarily to a good degree. This is because India can`t risk being seen as this country taking half-measures and playing for both sides in this game and obviously Russia is not going to be happy still selling cheap oil to a country condemning its action especially when it is one of its closest allies (a true kattappa Bahubali moment it will be). We necessarily risk antagonising Russia and facing bitter consequences as the rest of the world has done before and is doing now as Russia does not need India even nearly as much as India needs Russia.

Why is this problematic?

1.     India derives a significant amount of soft power through close diplomatic ties and trade with Russia. And India right now is in no shape and size to compete with Russia and the potential sanctions it could slap on us, especially given Russia`s clear warning to the world that anyone who seeks to interfere with the war will be met with severe consequences and when Putin says such things he normally is not joking or exaggerating.

2.     Most importantly, Russian Federation has been India`s largest supplier of arms in addition to oil. Like it or not, India needs those arms to continue its anti-terror combat and repeatedly push two hostile neighbours back to their borders; be it the helicopters, AK-47s or even the S-400 missiles which avoided US CAATSA sanctions. To make matters worse, India`s domestic production of arms and its failure to bring in the private sector to the defence though better than before is still a matter of worry. So, for the near future if not forever, Russian support for our defence is necessary.

The question of China

Russian Support for India is particularly crucial when it comes to Indian skirmishes with China. Yes, Russia is a Chinese ally, is part of its OBOR initiative and they share a common nemesis in the US. However, when it comes to India`s fight with China, Russia is as much reliable and important an ally as the West or the Quad is. Why is this true?

1.     Russia`s position concerning the India-China issue has been one of non-alignment as well. It continues to provide India with the necessary weaponry and oil while engaging in its bilateral trade with China. The soft power India gains by having Russian support is helpful as China would not want to escalate things to a level where it must make its strongest and largest trade partner choose between two of its favourite allies.

2.     Crucially, India antagonising Russia will be the tipping point for Russia to pick China and support its territorial claims over India. When India is no longer the ally Russia thought it had, it is not a difficult decision for Russia to strengthen ties militaristically with China especially if India`s alternative again would be the US and Europe to defend ourselves against Chinese aggression.

3.     The Soviet Motherland has long been a strong ally of India and has stood by them during times of conflict such as the Indo-China war, unlike the US which has historically supported Pakistan and is now withdrawing from foreign bases including Afghanistan, leaving India to deal with the Taliban and potential terror threats on its own.

Conclusion

Look at the end of the day, no country has become a superpower by being a charitable clinic stitching up the wounds of others. All the assistance provided be it financial or military support by countries is driven by strategic motives of enhancing soft power or creating a multipolar world. What India doing is not any different and its vilification for purchasing Russian oil is illogical and morally incorrect at best.

So, if it is a question of “To buy or not to buy,” I say we keep buying as long as they keep selling cheaply.

Article By,

A currently bored but passionate International Relations Geek,

Yours Truly,

Ganesh Prasad

NOTE: This blog is strictly an opinionated piece written after extensive research and does not intend to affirm or advance any political agenda.