March 17, 2023
NEW DELHI – On February 5, the European Union banned Russian fuels. India decided to import Russian crude oil at a 30 percent discount to strengthen its energy security. It started refining Russian oil to bolster its export to Europe. India’s export of petroleum products to the EU countries rose 20.4 percent year-on-year in April-January to 11.6 million tonnes. In January 2023, India surpassed China to emerge as the largest importer of sea-borne Russian oil, which rose by 260kbd month-on-month in December to reach 1.2mbd in January. India had stopped importing oil from Iran earlier due to US sanctions. In the context of Russia, the United States has taken a lenient view of the import. However, India has strongly defended its decision to buy oil from Russia; Pakistan has joined the game and decided to import oil from Russia in currencies of “friendly” non-western countries. Cash strapped economy of Pakistan is likely to save around $2 billion once it starts importing in April. Though for a long time, Pakistan’s desire to import oil from Russia faced political problems as former Prime Minister Imran Khan was voted out of power. The new regime led by Shabaz Sharif, which faced an imminent economic crisis, was keen on Western help to negotiate an International Monetary Fund bailout package to save itself from bankruptcy. Though it postponed buying oil from Russia, it is now seriously reconsidering its decision given the burgeoning oil import bill.
Bangladesh also explored the opportunity to import energy from Russia. In August last year, it was reported that Bangladesh negotiated with Russian company Rosneft to import crude oil at $59 per barrel. However, it was shelved as Bangladesh’s trade with Russia was insufficient to pay for the Russian oil in Ruble. However, many attribute this decision to Sheikh Hasina’s decision not to displease Washington. However, Dhaka has decided to import oil from India, which will be cheaper according to some estimates, and it will save $1.5 million per 100,000 tons of fuel oil due to less transport cost given the distance. Considering the dwindling foreign currency reserve, Bangladesh now has sought to import oil from Saudi Arabia on deferred payment. One has witnessed power outages in Pakistan, Bangladesh and Sri Lanka as private producers closed down electricity generation due to the rising oil price in the international market, raising production costs hugely.
Sri Lanka, which declared itself bankrupt as it defaulted to pay international lenders, faced a severe energy crisis and a complete blackout that added to the popular disenchantment that saw a powerful President being evicted from his office. In June last year, it decided to approach Russia for oil. In May and June last year, it imported oil from Russia to meet its energy need. However, it could not succeed because of its bankruptcy status and sanction on Russia, and Banks were unwilling to open Letters of Credit that would have enabled import. Moreover, Sri Lanka requires debt restructuring and cannot openly defy Western sanctions. It has been importing oil through Dubai-based Coral Energy. Like Bangladesh, it is exploring various options to import oil from a third party. In fact, and quite ironically, the third-party route is also taken by the United States, Australia and Europe. For example, Russia’s Virgin gas oil from two Indian companies. Since the sanction was imposed, oil importers have devised an innovative formula to relabel Russian oil and sell it in the international market. India is increasingly using rupees to settle its oil bill with Russia. Sri Lanka has also opted to pay in Indian rupees as both these countries are allowed to open Vostro accounts.
Western sanction and 0il price
It is important to note that most of the countries in the region are energy-dependent and to boost the post-Covid economy, energy becomes a determining factor. In December G7, the EU decided to cap Russian oil, priced above $60 a barrel and not eligible for Western insurance, brokering for sea-borne oil. This was a measure to stop the sale of crude to oil Russia’s war machinery. In December, the Western countries imposed two caps on Russian oil products, one on products that trade at a premium to crude, such as diesel or gas oil, and one for products that trade at a discount to crude, such as fuel oil.
Though there are debates on whether the sanction on Russia is working, it cannot be denied that the rise in international oil prices due to the war had a cascading effect on the economies of the region. The sanctions imposed in February 2022 made the Russian Ruble collapse against the US dollar and immediately impacted the oil price. The countries of the South Asian region also saw their rupees crashing against the US dollar, making imports unsustainable. Many of these countries, baring India, banned the import of luxury items and placed restrictions on the opening of Letters of credit. As the countries were looking for alternatives to avoid US sanctions, the OPEC countries decided to reduce oil production in November, blaming global economic uncertainty, adding to the already volatile oil market.
The most significant fallout of the Russia-Ukraine war was its impact on the energy market. As the West put sanctions on Russian companies, countries scrambled to find alternatives to Russian energy. South Asia, which was recovering from Covid, was not an exception. The oil price in the international market soared, impacting an economic recovery that the countries of the region were looking forward to. It is not surprising that, with a depleted reserve, the growth rates are seeing a downward trend. Though there are several factors, the most important has been the rising oil price that has precipitated inflation. For example, in the 2022-23 financial year, India grew at 7 percent; Pakistan, facing a severe economic crisis, is projected to grow at 4.8 percent; Bangladesh at 7.10 percent; and Sri Lanka will have a negative growth rate.
Most of these countries will go for an election next year. Inflations and local currencies in these countries continue to struggle against the dollar, and unemployment will impact elections. While India has been able to keep the price of petrol in control due to the import of crude oil from Russia, other countries have opted for third-country import to avoid Western sanctions. Though it is difficult to say whether the Western sanction on Russia is successful, one can conclude it has impacted the economies of developing countries caught between Russia and the western world and has borne huge costs due to the rise in crude oil impairing their economic development.