As Western sanctions tighten their grip on Russian oil exports, a dramatic shift in the Indian market leaves small traders gasping for air.
At a Glance
- Dozens of small trading players and middlemen have exited the Russian crude oil trade to India due to soaring interest rates and funding costs.
- Russia has become India’s largest crude supplier since 2022, despite Western sanctions.
- Major players like Litasco Middle East and Dubai-based companies now dominate the trade.
- Indian demand for Russian crude remains high, but narrowing discounts have led to an 18% reduction in imports by private Indian refiners.
- The exodus of smaller traders is reshaping market prices and volumes, concentrating power in the hands of larger trading houses.
The Sanctions Squeeze: Russia’s Oil Industry Under Pressure
Russia’s full-scale invasion of Ukraine in February 2022 triggered a tidal wave of approximately two thousand sanctions by the US and its allies on Russian entities. These sanctions have significantly impacted Russia’s oil and gas sectors, which are crucial to its economy. While the oil industry has fared better than its gas counterpart, continuing to export to Asian markets, it faces revenue losses due to EU embargoes and price discounts.
The Russian government, desperate to compensate for budget losses, plans to increase taxes on the oil industry. This move, coupled with the departure of Western oilfield-services companies possessing critical technologies, could further impact Russia’s oil output and its ability to use energy as a political tool.
Today I am announcing our largest ever package of sanctions against the shadow fleet transporting Russian oil and those who enable it.
Russia's oil revenues are fuelling the fires of war and destruction in Ukraine and I am committed to using every tool at my disposal to disrupt… https://t.co/XzcVPdDjpN
— David Lammy (@DavidLammy) November 25, 2024
India’s Russian Oil Trade: A Shifting Landscape
As Western firms withdrew from Russian oil trades, a surge of new and obscure trading companies emerged to fill the void. These companies, often incorporated outside Europe with opaque management structures, initially thrived in the lucrative trade. However, the landscape is rapidly changing.
“Dozens of small trading players and middlemen have recently dropped out of trading Russian crude oil to India, as Russia’s interest rates and costs to fund trades have soared,” Reuters reported on Thursday, quoting trade sources and customs and shipping data.
Russia’s benchmark interest rate has skyrocketed to 21%, the highest in two decades, severely impacting trade funding costs. This financial squeeze has forced many middlemen out of the trade, leaving it in the hands of a few robust trading houses.
The Rise of Major Players
As smaller traders exit the stage, major players are stepping into the spotlight. Companies like Litasco Middle East, Hinera Trading, and Black Pearl Energy Trading now dominate the Russian oil trade to India. This consolidation of power in the hands of larger entities is reshaping the market dynamics, potentially influencing prices and trade volumes.
Despite the shifting landscape, India’s appetite for Russian crude remains robust. However, the narrowing discounts on Russian oil are starting to impact import volumes. As reported by the New Indian Express, “India’s demand for Russian crude, which is cheaper than alternatives due to the sanctions, has been so high recently that the discounts at which Russia’s oil is selling to India have narrowed. As a result, private Indian refiners, including Reliance Industries and Rosneft-controlled Nayara Energy, cut their imports of Russian crude by 18% in November compared to October.”
The Bigger Picture: Russia’s Energy Challenges
While Russia’s oil sector grapples with these market shifts, its natural gas industry faces even steeper challenges. Gazprom, Russia’s natural-gas giant, has suffered greatly from decoupling from the EU market, primarily due to self-imposed cutoffs rather than sanctions. The company’s revenue and profits have plummeted, with a reported net loss of almost $7 billion in 2023.
“Our Chinese friends are tough bargainers,” Russian President Vladimir Putin admitted, hinting at the challenges Russia faces in redirecting its energy exports to Asian markets.
Gazprom’s struggles are compounded by a lack of infrastructure to redirect gas to Asian markets and the absence of LNG plants in western Siberia. The proposed Power of Siberia-2 pipeline to China faces significant hurdles, including high construction costs and potentially unprofitable gas prices.
As Western sanctions continue to reshape the global energy landscape, Russia’s oil and gas sectors face an uncertain future. The consolidation of the Indian oil trade in the hands of major players may provide short-term stability, but the long-term impacts on Russia’s energy empire remain to be seen.
