Global energy shifts: Russian oil, the rise of India, and emerging trading centres

A key theme of our Energy in Crisis series is the shift of power dynamics related to energy. Currently, there is no greater example than the case of Russian oil.

The invasion followed by sanctions from Western nations has triggered an extensive rerouting of energy pathways, marking one of the most substantial shifts observed in recent history. The redirection has predominantly occurred from Western regions to the Middle East and Asia.

The increasing role of India

The most documented change primarily involves Russian oil now being directed from the EU to India, alongside a notable rise in the amount being exported, despite sanctions.

In fact, the International Energy Agency (IEA) announced that in July 2023, Russian oil export levels had reached their highest level since the G7 price limit (USD 60 per barrel) was introduced after the invasion in February 2022.

While there has been an increase in the volume of Russian exports, at first glance, the financial gain has not followed. This is due to Russia’s approach of targeting markets untouched by sanctions, namely India and China.

Notably, India, which hosts the world’s largest oil refinery, the Jamnagar Refinery, has been acquiring Russian crude oil well below the price cap. Leveraging both the favourable price and its robust refining capacities, India has capitalised on this situation by procuring, processing on a large scale, and subsequently exporting elsewhere at the market rate.

Currently, about a quarter of Russia’s crude and refined oil exports are directed to India. Interestingly, the average cost of Russian crude oil, including shipping charges, when it reached India in June 2023, reached its lowest point since Russia’s invasion of Ukraine in February 2022.

In June, this cost was recorded at USD 68.17, down from May’s USD 70.17 and significantly lower than the USD 100.48 from a year earlier. It is worth noting that although the price of USD 68.17 surpasses the price cap, the G7 threshold excludes shipping expenses.

As a result, India acquires oil at a notably lower cost. Despite Russia’s oil being sold to India at a reduced price, there are key factors that prevent the country from enduring substantial financial losses.

A crucial facet is the proximity of India’s second-largest refinery, the Nayara Energy-owned Vadinar complex, located less than 10 miles away from the port.

Notably, Nayara Energy is co-owned by Rosneft, Russia’s state oil company, with the remaining stake held by a Russian investment group. This configuration means that as trade activities escalate in this region, Russian companies and its government stand to gain significant benefits.

There has been another loophole recently discovered, enabling Russia to further shield itself from the financial impact of its cheap oil exports to India. This method has involved the inflation of shipping expenditures, allowing Russian companies to generate greater profits from their oil exports.

The inflation of expenses related to cost, insurance, and freight by an additional USD 800 million has meant that Russian companies earned an extra USD 39 billion from May to July 2023.

These strategies highlight President Putin’s growing willingness to use evasive methods to lessen the financial impact of sanctions, which makes the Western pressure on Russia to cease the war less effective.

The end destination of refined Russian oil

Although Western nations have taken actions to impede Russian oil exports, the destination of Russian oil might appear paradoxical.

This is because some EU member states, including the Netherlands, Germany, Italy, and France - as indicated by India’s Ministry of Commerce and Industry - make up significant oil export markets for India. As a result, Russian oil is channelled back into the EU, facilitated by India as a profitable intermediary.

The sustainability of India’s long-term strategy has come under scrutiny as the competitive pricing advantage of Russian oil diminishes, and concerns arise regarding the impact of Nayara Energy’s Russian ownership on its credit rating.

These factors could potentially prompt India to lean toward Middle Eastern oil rather than Russian oil, raising the question of what alternative markets Russia might seek next, making the oil market’s future uncertain.

The shift from the West to the Middle East

Another intriguing shift caused by the Russian invasion is the relocation of the oil trading centre from Switzerland, particularly Geneva, to Dubai.

Historically, Switzerland held the position of an oil trading hub due to its political neutrality, discreet banking practices, and its role in trading oil from conflict-ridden regions. All of this created a strategic advantage for Switzerland in global oil trade relations.

After the Russian invasion, Switzerland somewhat deviated from its neutral stance and distanced itself from Russia due to Western sanctions. Like India, the United Arab Emirates (UAE) has capitalised on these geopolitical changes.

The transition of oil trading firms to Dubai can be divided into two camps: established companies that have set up separate operations there to trade oil within the G7 price limits, ensuring continued access to Western markets, and relatively unknown smaller trading entities that have been incorporated in the past 18 months.

The emergence of the latter group has raised several concerns. Their ambiguous nature, lack of transparent ownership records, and reliance on lesser-known insurance providers and older, less dependable vessels have led to uneasiness among industry observers.

From a reputational standpoint, there is a worry that these trading companies could reintroduce large-scale corruption into the industry. Moreover, from a logistical perspective, the use of less reliable insurance companies and older tankers elevates the risk of disruptions caused by accidents.

While the EU and the US have provided limited public commentary regarding this change, it is highly likely that they view it unfavourably. This negative sentiment stems from the continued trend of Russian oil being traded beyond the established price cap and the diminishing significance of Western oil trading markets.

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Each week, our Threat Intelligence team will be analysing a different energy industry as part of our Energy in Crisis series (including Nuclear, Wind, Solar, Hydroelectric and more). Follow us here or on LinkedIn to stay up-to-date with the latest analysis.