Asia’s Hunger For Energy Will Not Save Russia’s Economy

Over the last year, the West imposed sanctions on Moscow, cut back its purchases of Russian hydrocarbons, and sent military support to Ukraine. But the world’s largest democracy, and one of the United States’ biggest allies in Asia, India, hasn’t done any of that. Rather, India has seized the opportunity to purchase cheap Russian energy to bolster its ailing economy. Surprisingly, US Secretary of the Treasury Janet Yellen has pointed out that “India is welcome to purchase as much oil as it wants”, as it gets Russia oil at a large discount, up to 30 percent and more.

Several key factors underlie this US policy. India is a democratic rival and a necessary counterbalance to China, the principal peer competitor of the U.S. in the 21^st century and possibly beyond. Thus, increasing cooperation between Russia and India is not as important as having New Delhi as the key partner of Washington, D.C. Secondly, for Russia, Asian markets cannot substitute for European markets. Its 2022 record-breaking deficit driven by declining energy revenues is evidence of that. Lastly, and most importantly, Russia’s “pivot to Asia” is being done from a position of weakness, meaning many of these new commercial arrangements are not to Russia’s benefit.

With purchases of 1.2 million barrels per day in December 2022, India is importing 33 times more Russian oil than pre-invasion levels. Despite this prolific increase, India is only spending twice as much on oil imports overall, with the majority of them not coming from Russia. While India imports nearly 85% of its total oil consumption, sourcing mostly from the Gulf, Russia’s share of the pie has expanded to 28% this January compared to 0.2% this time last year.

As the West retaliated with sanctions on Russian energy exports followed by a price cap of $60/barrel, Indian refiners started lapping up Russian crude at discounts. The existing structure of sourcing cheap Russian Ural blend has allowed the government to halt raising fuel prices and solidified Modi’s voter base.

India’s rival Pakistan has seen India’s success in leveraging Russia’s weakness for cheap oil and seeks to emulate its successes. Pakistan plans to begin purchasing Russian oil starting in late March. Pakistan’s devastating flooding and ongoing energy crisis provide it every incentive to purchase Russian oil. Ongoing financial difficulties and exploding import costs have pushed it on the same path as India: extract cheap oil imports from Russia while it is down due to Western sanctions.

Russia is now in a trap of its own making. Russia believed Asian markets could immediately pick up the slack, but its partners are savvy traders. To blunt the impact of Western sanctions, Russia redirected crude exports to China, India, and Turkey, exploiting its access to ports on three different seas (Baltic, Black, and in the Pacific), with a sizable oil shipping infrastructure and domestic market that is shielded from sanctions.

These new arrangements, however, cannot fill the losses incurred from the disappearance of the European market. Russian Ural is trading at $49.50 a barrel, nearly half its price a year earlier, and export revenues from oil and gas have dropped by 46% in January 2023 from the same month last year.

While India has significant leverage over the West, Pakistan has lost much of its strategic value for the US after the latter’s withdrawal from Afghanistan in 2021. Despite this, Russia is in such a weak geopolitical position that even Pakistan is capable of extracting concessions from the Kremlin.

Last month the Pakistani government announced a new energy conservation plan which will help the treasury save $274 million, and it openly dismisses purchasing Russian oil at too high of a price. Given the volatility in its foreign exchange reserves and domestic energy demand, Pakistan needs cheap fuel. Russia is an option, but only one of many given Pakistan’s locale so close to so many energy producers.

Structural issues will impede any strong energy trade relationship between Islamabad and Moscow. Pakistan lacks refinery infrastructure that can fully process Russian crude. Secondly, Russia’s offer for Pakistan to pay for oil in the currencies of “friendly countries”, mainly the Gulf states (similar to India paying in dirhams for Russian oil) may not lead to anything substantial because many of Pakistan’s creditors (Saudi Arabia and UAE) are also its key oil suppliers. They will most likely want Pakistan to continue purchasing the more expensive but lighter sweeter Gulf crude paid in US dollars to stabilize its monetary position.

If even Pakistan can leverage itself against Russia, it should come as no surprise that China is in a fantastic position to bargain with the Kremlin. Russian exports of discounted crude and fuel oil to China have soared to record levels as Beijing continues its post-pandemic recovery. Going toe-to-toe with India, China imported 1.66 million barrels a day last month at significantly lower discounts of $13 and $8 a barrel for Russian Ural and ESPO, respectively. Despite the availability of cheap Russian crude, throughout 2022 Chinese state-owned oil companies were slow to expand oil import infrastructure, mostly since they did not want to be seen as openly supporting Moscow.

Despite the strengthening energy cooperation between Russia and other Asian countries, the former has near-zero leverage in these markets to lock in long-term energy export contracts that would be enough to stabilize the economy and finance the war simultaneously. While the Kremlin has continued its oil exports of 7 million barrels a day, the value of its oil exports has crashed from $600 million/day to $200 million/day. According to Deutsche Bank economists, Putin’s adventures in Ukraine have led the Russian economy to self-immolate, as Moscow is now losing $500 million a day from oil and gas export earnings compared to early last year.

Strong voices coming from Ukraine to sanction China and India over the purchase of Russian crude. The West’s inability to convince India to respect the sanctions regime reflects the deepening fissures in the international system and India’s comfortable position to play its long game. The laudable impulse to sanction everybody helping Moscow, particularly India, and others over trade with Russia, is hard to achieve for geopolitical reasons. Yet, clearly, the Kremlin has blundered into the hands of Washington, New Delhi, and Beijing. With India and China buying Russian crude way below the price cap, it is safe to say that the West’s financial squeeze on Moscow will achieve its intended consequences.

Co-written by Shallum David. With acknowledgments to Wesley Alexander Hill.