The US Treasury Secretary-elect has attracted much attention with his aggressive approach toward the Russian oil industry. Some of his recent remarks have raised questions on what the international impact could be, including for countries such as India, which buys a significant amount of its oil from Russia. This article goes deeper to explain the effects of his aggressive words for Russia’s oil business, and the repercussions on India.
In his Senate Finance Committee confirmation hearing, he stated that his predecessors were too weak against putting sanctions against the oil trade of the Russian federation. He stressed his willingness to increase pressure on the Russian side in terms of sanctions, especially the restriction of oil and gas activities, in order to lure the Russian Federation to the negotiating table. The statements he has already steered international oil prices to the upturn as markets prepared for tighter measures.
India’s Reliance on Russian Oil
India is the third largest consumer of crude oil and meets more than 85% of its capacity through imports. Russia was never a significant supplier to India until the Ukraine war started in February this 2022. But in 2024 Russian oil contributed as much as 37.6 percent of Indian oil imports. Russia has been able to offer quite large discounts which make it a popular supplier of crude oil for India, especially at a time when it is trying to diversify on the type of fuel it imports, and is generally looking to cut costs.
Possible Consequences of Strengthening Sanctions
New sanctions imposed in January which restricted business with tankers that facilitate Russia’s oil business have already sparked some future concern with regards to India’s crude import. These restrictions are all more precise and less easily avoidable than prior actions and could therefore impact the delivery of Russian crude to India. The degree of the effect that losing such a strong advocate as Bessent will have depends on how the Trump administration and its intermediaries will implement these sanctions.
Economic Implications to India
Severe restrictions on crude import from Russia can pose several economic problems to India. Firstly, the sources of importing oil may be expensive which would ultimately increase the energy bill in India. Secondly, the disruption in the provision of cheap Russian oil could destabilize the markets with resulting effects on inflation since costs of energy are passed through to other sectors.
Further, Indian attempts at internationalizing the rupee could be reversed. India and Russia, the two countries have discussed on how to trade a part of their oil payments in the Indian Rupee. But such stringent measures may pose challenges to these endeavours prompting India to pay more attention to her use of the US dollar in the external commerce domain.
Geopolitical Considerations
It can also be imperative for India to change its geopolitical stance accordingly. The fact that it has good relations with both the US and Russia might be put to the test as it tries to decode the effects of tighter penalties. India might have to tread the tightrope to ensure that it does not offend US sanctions but at the same time secure its supply of crude oil.
Economic Consequences for India Considering New Sanctions on Russian Oil
Energy is an essential element of India’s economy especially because it is among the largest consumer of crude oil globally. The warning by the US Treasury Secretary-elect that the existing sanctions on the Russian oil maybe further tightened may pose serious consequences for Indian economy.
Cost of Imports
India’s requirement of oil is highly imported, as more than 85 percent of India’s total requirement of crude oil is met through imports. Recently, Russia has been identified as one of the main suppliers because of the substantially lower prices in reaction to the geopolitical crises all over the world. Sudden cessation of cheap Russian supplies would require India to source its oil from other markets that, of course, are likely to be pricier.
The first cost that results from higher payments and therefore sourcing more expensive oil is the overall cost of imports. This leads to imbalance in the current account that increases the balance of payments of India because of high import cost. This new spending on imported oil may reduce spending on other important needs like building of infrastructure and social service delivery.
Inflationary Pressures
As much as one of the most obvious economic impacts of high prices in oil is inflation. The high rising of oil prices increases the aspects of price of various products and services. Compared to the base scenario transport costs would increase, so not only the cost of a daily ride to work or to school, but also the cost of transportation of goods by road, railway or air would rise. The inflationary effects would be felt in all sectors of our economy but especially the agricultural sector which is very sensitive to the price of diesel as most of their irrigation and transportation facilities are hiked due to the price for diesel resulting to high food prices.
High inflation reduces the real amounts of household disposable income and hence, actual consumption spending and hence, slows down the economic growth. The RBI may have to intervention either through the changes of the interest rates with possible imposition of measures to reduce inflation.
Impact on Energy Security
The pursuit of energy security in India is potentially at risk if more rigid sanctions on Russian oil are imposed. For several years now, India has been diversifying its energy supply to meet its requirements. Nevertheless, the emphasis was made on Russian oil because this source is rather cheap.
A disruption on this supply could force India to import more from Middle Eastern countries or consider developing new sources of energy like the renewable energy. The latter is a highly Favorable long-term development strategy, whereas the process of moving into a new phase might be quite problematic often, it requires considerable investments into infrastructures and technologies.
Efforts to internationalization of Rupee
In recent years in order to avoid the dominance of the US dollar in international trading and encourage the use of Indian Rupee in the external sector, India has been establishing trading strategies in that are cleared in the Indian Rupee with various nations and Russia is one among those. Such attempts could be hampered by the tightening of sanctions because every transaction involving the Russian side would attract additional attention.
The success of ‘Rupee Internationalization Strategy’ evidence, still strongly depends on the certainty of predictable trade relations. More rigorous measures can potentially reverse this stability, India’s plans to turn the rupee into an international trading currency.
Broader geopolitical and trade implications
Indian strategy for geopolitics always strived to maintain correct relations with leading world powers: the USA and Russia. A more delicate tension may be posed by stricter sanctions on Russian oil. Although it is in India’s strategic interest to remain deeply engaged with the US, its energy security imperative require it to be more practically useful to Russia.
If required, India may have to go for diplomatic lobbying at some point to negotiate waivers or come up with other ways and means that will not harm its geopolitics but will ensure its energy security, too. Furthermore, the problem might encourage India to seek deeper cooperation with other oil exporting countries and continue the development of renewable power sources.
Why India has so much dependency on imported crude oil?
Crude oil import is an area where Indian is heavily depended on because of the low production level and high increase in energy demands and for some economic factors. This reliance was highlighted as having significant implications for the country’s economy, energy security in addition to bringing political dimension into the game.
Limited Domestic Production
This leads to the revelation that India has a very small capacity to produce crude oil, which contributes to her high dependence on importation. India has some oil reserves, but the domestic production is unable to cater the ever increasing requirements of energy for the large population base and industries. Having a relatively small amount of proven oil reserves within the country, the exploration of new oil fields for their development has sadly lagged behind this demand.
Growing Energy Demands
Due to dramatic economic liberalization and increasing rates of urbanization, energy demand in India is on the rise. India, with a population of more than a billion, is the second-largest energy consumer after China and its demand is only increasing. The transportation sector on its own consumes most of the crude oil through millions of vehicles on road and growing air traffic. Further, the industrial sector depends on oil wherein manufacturing and electric power generation industries firmly planted their operations.
Economic Considerations
The importation of crude oil is relatively cheaper than the development of local sources since exploration involve equally vast sums of money. The world oil market provides a wide range of choices of suppliers for Indian oil imports that in turn enables the country to purchase oil at reasonable prices with satisfactory, reliable supplies. Also, the processing of imported crude oil is more cost effective than exporting the domestic crude, due to the efficiency and capital outlay involved in domestic production.
Strategic Diversification
Its import strategy needs to be diversified in order to address the issue on a reliable supply of energy. India can protect its interests against these restrictive elements by importing oil from different countries. With the diversification strategy energy security and continued growth of the India economy would be less impacted.
Geopolitical Factors
It is therefore clear that geopolitical relations are central to India’s crude oil imports plan. Bilateral relations are the primary mechanism that helps maintain contacts with India’s key partners in the oil market and find more favourable terms. This approach enables India to balance many challenges that characterize international politics as well as meet its energy requirement in the process.
How India can manage its dependency on crude oil imports?
India is a highly dependent nation on crude oil and this creates two major problems economically and strategically. Nevertheless, few measures can be employed that will enable energy security to be achieved while lessening the dependence on oil imports. Here are some key approaches:
Boosting Domestic Production
One of the lowest yet direct ways to cut import dependence is to increase domestic oil production. This has the implication of rising capital spending in the exploration and development of the oil fields. Techniques of increasing production include hydraulic fracturing and enhanced oil recovery where existing reserve is sought to be exhausted to the optimum. Further, enhancing an acceptable legal framework tends to encourage more participation of domestic and foreign investors in the oil sector.
Diversifying Energy Sources
It is important to encourage the use of many forms of energy other than crude oil. India can support the environmentally friendly and cost effective natural gas, bio fuels, and renewable energy source (solar, wind and Hydro power). For example, the government can offer some incentives for the use and purchase of EVs and establish the needful charging stations in this shift. Other ways of reducing crude oil utilisation include; the enhancement of natural gas for transportation and industrial purposes.
Enhancing Energy Efficiency
The rationalization of energy usage in all relevant segments implies achieving a change in oil consumption. This encompasses integrating energy efficiency measures in industries and transport as well as in residential sections. The government can use policy measures such as higher energy efficiency standards and using advertisement to ensure that the consumers adopt energy efficiency measures. Other steps to this goal can include the promotion of energy efficient appliances, green buildings and the use of public transport.
Developing Strategic Reserves
Stockpiling and sustaining the SPRs may well act as insurance against supply shocks and price fluctuations. On this front, India has already built some of strategic oil storage facilities to store the crude. Over these reserves and ensuring best practices means that they can act as a safety net under times of geopolitical tensions and supply shocks.
Building Up Strong Relationships with Other Countries
Development and preservation of long-time cooperative relationships with oil-exporting countries are necessary for assuring stable and diverse supply of oil. Long term supply contracts and joint ventures and business and diplomatic relations with countries such as the United States of America, Saudi Arabia and the United Arab Emirates will guarantee regular supply of oil to the far reaching world even when it is affected by the fickle international market. Regional energy security can also be improved by cooperation of countries of the neighbourhood on energy initiatives.
Promoting Innovation and Research
Such fundamental new technologies such as those invested in new and renewable energy sources as well as improved oil drilling techniques also pay off in the long run. Past and present efforts, like boosting innovation in clean energy like hydrogen fuel cell or encouraging the start-up in the energy sector, are the ways that help for the better solution. Financial commitment in the form of government grants, tax reliefs and support, and public private partnerships can front the culture change for more local supply of energy.