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India’s purchases of discounted Russian oil led to tariff penalties from the Trump administration and sanctions from the EU.
Although India has claimed that it requires access to cheaper Russian oil to provide energy for its developing economy, the United States has argued that India instead was taking advantage of the discounted crude to export fuels.
The country emerged as a refinery hub long before purchases of discounted Russian oil began, a testament to India’s industrial policy in the energy sector.
India’s ambitious refinery plans could face headwinds if geopolitical tensions with both the United States and the EU over its purchases of Russian oil persist.
The United States, the top importer of Indian goods, imposed tariffs of 50 percent on about half of Indian exports on August 27, following a Trump administrationexecutive order targeting the country for its continued imports of discountedRussian oil. Indian government officials view U.S. actions as unfair, given that other countries continue to purchase Russian oil without penalty.
India has justified these oil imports as a matter of national interest to secure energy for its large population and developing economy. This argument, however, has been contested by Trump officialscriticizing India for profiting from Russia’s war in Ukraine, given the arbitrage of importing cheaper (discounted) Russian oil andexporting refined fuel at global prices, turning India into a refinery hub.
This blog aims to provide context to the geopolitical tensions between the United States and India around the latter’s purchases of discounted Russian oil. While such imports have undoubtedly benefited the country, India has been working for decades to build a global refining industry, long before its purchases of Russian crude. U.S.-India trade tensions, however, are not occurring in isolation. On July 18, the EU imposed sanctions on purchases of refined products derived from Russian oil and sanctioned an Indian oil refinery directly. The rise in geopolitical tensions linked to India’s purchases of Russian oil, if not addressed, could ultimately hinder the country’s ambitious refinery expansion plans to almost double the country’s refinery capacity by 2030.
India’s refining plans began decades ago
India is not only a net exporter of fuels, but according toUNCTAD, the country has been the second-largest exporter of refined petroleum products in dollar terms after the United States since 2022, despite importing 90 percent of its crude oil. What may be underappreciated in the tensions between India and the United States over the purchases of Russian crude is the importance of the refining sector to India, which accounts for approximately 15-20 percent of India’s totalexports, its largest export category during the 2017-2023 period. India’s oil industry has also been a significant source of foreign exchange and fiscal revenue, particularly over the last several years.
State-run companies dominate India’s refining industry, an example of state capitalism in the energy sector. However, it was the 14 percent yearly growth in private sector refining capacity during this period that explains India’s transformation into a refinery export powerhouse (see Figure 1).
Private companies currently hold approximately 40 percent of the country’s refinery capacity but are responsible for the bulk of India’s refined petroleum exports, representing about 75-80 percent of the volume and value of India’s refined petroleumexports. India’s largest private refinery, Reliance Industries Limited (RIL), with a refining capacity of 1.4 million barrels per day (b/d) through its integrated refinery complex atJamnagar, is one of the world’s largest and most complex refineries. The company owns nearly two-thirds of India’s private sector refining capacity and approximately one-quarter of the country’s total refining capacity. Nayara Energy (formerly Essar Oil) owns the remaining private sector capacity. It is currently underEU sanctions, as Russia’s state-owned company Rosneft owns 49 percent of its equity.
India’s refining sector: A prime example of industrial policy
A series of public policy changes in the 1990s on trade, domestic pricing policy and private investment deregulation launched the dramatic transformation of India’s refining sector into an export-led industry.
In the late 1990s and early 2000s, Indialiberalized its oil sector, which opened the door for 100 percent private ownership in its refining industry. The government also deregulated domestic fuel prices, further improving the outlook for private investment. Oil sector liberalization occurred alongside economy-wide reforms that led the government to establishspecial economic zones (SEZs).
These SEZs created favorable investment conditions, allowing exemptions from a range of customs duties, taxes, and permits for setting up business and manufacturing, provided the goods were exported. Private sector refiners establish themselves under this export-orientedregime, prioritizing global markets, leaving state-owned refineries to mainly supply the domestic market. Finally, the government also allowed private refineries to import crude oil directly, rather than requiring them to purchase it from the Indian national oil company, thereby improving their profitability.
This explains both RIL’s and Nayara’s investments in complex refineries with high-yield products that can meet the more environmentally stringent standards of global markets, particularly in advanced economies. In addition, the plants can process a wide range of crude oils, including the cheaper heavier and higher-sulfur (“sour”) types produced by Russia and Venezuela. It is precisely these characteristics that led the Russian oil company Rosneft to acquire Nayara (former Essar) in 2016.
India was a refining hub before cheap Russian crude, but the tensions with the United States and the EU could threaten expansion plans
The rise in US-India trade tensions and the EU’s ban on imports of refined products derived from Russian oil are occurring amid India’s majorrefinery expansion ambitions. The Indian government has plans to nearly double its refinery capacity by 2030 or later to 9 million barrels per day (b/d) from its current 5.1 million b/d.
While the IEA expects India to become the fastest-growing market for oil consumption, forecasting demand growth of 1.2 million b/d between 2023 and 2030, it has a more conservative forecast for refining increases, estimating refinery capacity will grow about 1 million b/d by 2030.
Buoying domestic oil demand is the main reason given by the government for the capacity expansions, which are happening mostly in the state-owned refineries with strong government backing. India is likely to be one of the most dynamic markets for refinery expansions globally, but the magnitude of the government’s ambitious plans was already facing some uncertainty given the expected increase of EV adoption in India. However, geopolitical tensions with both the United States and the EU linked to India’s purchases of Russian oil could also impact those ambitious expansion plans.
So while India was a refining hub before the discounted Russian crude became available, trade tensions with the United States along with EU sanctions banning imports of refined products derived from Russian crude, might also hinder some of India’s ambitious refinery plans. Both actions have now put a spotlight on how India has been outsourcing its crude, with Russian oil imports growing from 2 percent of India’s total oil imports in 2021 to 35-40 percent now. EU sanctions, in particular, will directly impact approximately $14-15 billion worth of Indian refined product exports. India had become the EU’s largest supplier of refined products, with the EU absorbing about 25 percent of Indian refinery exports.
A potential resolution to India’s current geopolitical tensions with the United States and the EU might entail a significant reduction in the share of Russian oil processed by Indian refiners and diversification to other suppliers such as Canada. Alternatively, Indian refiners can look for markets in other developing economies in Southeast Asia, Latin America, and Africa, increasing the geopolitical fragmentation in the market for refined products. Either way, India’s purchases of discounted Russian oil are no longer cost-free and will entail important trade-offs for the Indian government and its global refinery ambitions.
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