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External affairs minister S Jaishankar on Tuesday said that India will continue to buy oil from Russia as it was to the former's advantage.

Up until very recently, India barely bought any oil from Russia. For perspective, in FY22, India bought around 2.4% of its overall oil imports (in volume terms) from Russia. In FY21, it was just 1.7%.

Nonetheless, Russia’s attack on Ukraine in February changed things, as oil prices soared. In December, the price of the Indian basket of crude oil had averaged at $73.3 per barrel. Back then, the oil market did not expect Russia to attack Ukraine. But as the possibility went up, so, did oil price. It averaged at $84.7 in January, $94.1 in February and shot up to $112.9 in March, following Russia's invasion of Ukraine in late February.

India’s dependency on oil imports has gone up over the years. From April to September this year, it imported 86.8% of its total consumption needs. During the same period in 2021-22, it had imported 84.8%.

In this scenario, when oil prices go up, two things happen. First, the price of petroleum products such as petrol, diesel, kerosene and cooking gas, also rises, unless of course, the government asks oil marketing companies (OMCs) to not raise prices. It then compensates the OMCs out of taxes. But as history tells us, OMCs aren’t always compensated for 100% of under-recoveries. So, someone does end up bearing the cost, either in the form of higher prices or in the form of undercompensated under-recoveries.

Second, with oil prices going up, more dollars are needed to buy oil. This increases the demand for the dollar and in turn, puts pressure on the value of the rupee. This in an environment where the rich world central banks have been increasing their interest rates in order to control decadal-high inflation. This factor has also been putting pressure on the value of the rupee. A weaker rupee along with higher prices for petroleum products, feed into retail inflation and makes things difficult for the citizens on the whole.

Taking these factors into account, India decided to buy oil from Russia, even though this didn’t go down well with the US and many countries in Europe. From April to September, in volume terms, India has bought around 14.6% of the total oil it has imported from Russia. In fact, Russia is now India’s third largest import partner when it comes to oil, behind Saudi Arabia and Iraq, having displaced United Arab Emirates from the third position.

The oil from Russia has been bought at a price which is 7.2% lower than the average price that India has paid for imported oil this year. This has helped control the trade deficit by a small amount. Trade deficit is the difference between overall goods exports and goods imports.

Further, the original idea was to buy oil from Russia in rupees. This would lower the demand for dollars India needs to buy imported oil, in turn, putting lesser pressure on the value of the rupee against the dollar.

Nonetheless, media reports suggest that Indian oil companies continue to buy oil from Russia using dollars.

A possible reason for this could lie in the fact that Russia barely imports goods from India. Between April and September, the country has imported goods worth just $1.3 billion from India. In comparison, India has imported oil worth $15.7 billion from Russia.

If Russia had accepted the payments for oil in rupees, it would have ended up with a huge rupee surplus, which it wouldn’t have any immediate use for. A September end Reuters newsreport suggests that “traders supplying Russian oil in July had asked at least two Indian companies to settle in dirham". But that payment didn’t go through and ultimately the oil imports were paid for in dollars.

All said, with Russian oil being bought in dollars, the whole thing makes sense as long as India is buying oil at a discount to prevailing market price. And that’s the long and the short of it.

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