Mint Explainer | Does India have a chance to escape the tariffs on Russian oil?

Summary

In the past, India has cut back oil purchases from sanctioned nations. This time, the situation is different. The global oil supply is tight due to the Russia-Ukraine and West Asian crisis.

India faces up to 100% tariff after the Lindsey O Graham Sanctioning Russia and Iran Act became a law in the US. Will President Donald Trump's surprising decision to buy diesel from Russia give India a chance to escape the tariffs? Mint explains.

What does the new US law say?

To deprive Russia of its oil revenues and choke its funding for the Ukraine war, the US Congress passed the Lindsey O Graham Sanctioning Russia and Iran Act recently and the same was signed into a law by the US President Donald Trump on 18 September. The law authorizes Trump to impose tariffs up to 100% on countries that are among the top five importers of Russian oil or gas by volume in the preceding 12 months and continue to do so 30 days after the law was enacted. The tariffs will be over and above the existing levies.

Will the law affect India?

Yes. In September, Russia accounted for 35% of India's total crude oil imports. The share is lower than 56% in July because of lower availability and possible effect of the new law. As things stand India will qualify for the tariffs. Any tariff, 100% or lower, will make India's exports to the US uncompetitive. The US accounts for 20% of India's overall exports. With the chances of Russia ending the war and accepting a free and independent Ukraine being remote, India has three options -- cut Russian oil imports, continue imports and brave the sanctions or convince the Trump for a possible waiver.

Can India cut Russian oil imports completely?

In the past, India has cut back oil purchases from sanctioned nations. This time, the situation is different. The global oil supply is tight due to the Russia-Ukraine and West Asian crisis. Shifting the entire volume (in September, India imported 1.74 million barrels a day of Russian crude) to other sources will not only be challenging but costly. Inflation in India, at 5.5%, is already well above the 4% target.

What was Trump's surprising announcement last week?

On 9 October, Trump announced that he had struck a deal with Russian president Vladimir Putin for Russia to supply 300,000 tonnes of diesel to the US and the global markets. This follows run away retail diesel prices in the US of $6.28 per gallon last week.

With mid-term election due on 3 November, Trump is under immense pressure to lower fuel costs and reverse the electoral fortunes of the Republicans who are poised to lose badly. Though members of the Congress from both parties have opposed this move, Trump has refused to back down.

Will this move help India?

By buying diesel from Russia, Trump is clearly going against the objectives of the Russian Sanctions Act which seeks to deprive Putin of resources to fund the Ukraine war. It will also put him in a difficult position to ask India not to buy Russian oil. India can impress upon Trump and seek a waiver from the Congress on the grounds that supply is tight and shift away from Russian oil would case global oil prices to rise. But some experts warn that Trump may still impose tariff to pressurise India to sign the trade deal.