The Economist - UK (2022-04-02)

66 Finance&economics TheEconomistApril2nd 2022

Russianoil(2)

Sidechannels

N

othing short ofoutright war and

plagueisaslikelytotankIndia’secon­

omyasmuchasrising oilprices.Petro­

leumproductsmadeupmorethana quar­

terofthecountry’soverallspendingonim­

portslastyear—morethanforanyother

bigeconomy.CouldcheapRussiancrude

lowerthebill?

Indiahasrefrainedfromcondemning

RussiaforitsinvasionofUkraine,evenas

theWesthasimposedsanctions.Butbig

Russianbankshavebeencutofffromthe

swiftmessagingsystemusedforcross­

border transactions andAmerican mea­

sureshavelargelyblockedtheuseofdol­

lars, complicating trade. Sergei Lavrov,

Russia’sforeignminister,wasduetovisit

DelhionMarch31st,afterwewrotethis.

Oneitemontheagendawasexpectedtobe

findingwaystoworkaroundsanctionsto

enableRussianoilsalestoIndia.

Oil­and­gasfirmsinthetwocountries

alreadyworktogether.ongcVidesh,the

Indiangovernment’soverseasoil­and­gas

exploration and production arm, is in­

volvedinthreeprojectsinRussia,forin­

stance; Rosneft, a Russian state­owned

giant,owns49%ofNayaraEnergy,a Mum­

bai­basedfirmwith6,000fillingstations

anda largerefineryinGujarat.

Yetoveralloiltradebetweenthecoun­

triesislimited:accordingtoIndia’sgov­

ernment,lessthan1%ofitsoilimportslast

yearcamefromRussia.Thefactthattrade

isa meretrickleisa reflectionofgeography

ratherthanpolitics.Indiaboughtoilfrom

Iran,anothercountrythatfacedAmerican

sanctions,untilabout2019.ButIranissep­

aratedfromIndiaonlybya bodyofwater.

Bycontrast,thereareneitherdirectover­

landroutesnorshortwatercrossingsfrom

RussiatoIndia.

Inrecentweeksa spateofreportsinthe

Indianmediahavedetailednewpurchase

M UMBAI

Indiagrappleswiththenewrealitiesoftheglobaloilmarket

Tzinova  of  Holland  &  Knight,  a  law  firm,

compliance  staff  must  study  hundreds  of

pages  of  legalese,  making  many  Russian

deals  hardly  worth  the  hassle.  As  a  result,

Urals crude, the grade pumped out by Rus­

sia,  is  currently  trading  at  a  discount  of

around $31 a barrel. One trader expects the

gap to hit $40 within a week’s time. 

Two big countries that have not joined

in  with  the  West’s  sanctions—India  and

China—sense a bargain to be had. India is

certainly  acting  on  the  opportunity.  Rus­

sian ship loadings headed for the subconti­

nent are expected to have risen to 230,000

bpd in March, up from nothing in the pre­

vious  three  months  (this  excludes  cpc,  a

blend  of  mainly  Kazakh  and  Russian

crude). Yet India is unlikely to buy much, at

least in the short term. Nearly half its im­

ports come from the Middle East, and ship­

ping  from  the  Gulf  is  much  cheaper  than

shipping from Russia. Payment cannot be

settled in dollars, requiring India to experi­

ment with a rouble­rupee mechanism (see

next story). 

Adi Imsirovic, a former oil­trading boss

of Gazprom now at the Oxford Institute of

Energy Studies, does not see India buying

more  than  10m  barrels  a  month.  This  is

small, considering that Russia’s pool of un­

wanted oil is expected by the International

Energy  Agency,  an  official  forecaster,  to

reach 3m bpd in April.

Only  China,  then,  can  save  Russia.  It

imports  a  total  of  about  10.5m  bpd  (11%  of

the world’s daily production). Mr Imsirovic

thinks  China  could  opportunistically  in­

crease its purchases to 12m bpd. That could

allow it to buy 60m from Russia in relative­

ly short order. It helps that China has lots

of empty storage.

None of this is happening yet. Even for

China, transporting oil from Russia has be­

come harder. Whereas shipment from Rus­

sia  to  Europe  usually  takes  three  or  four

days, to Asia it takes 40. Oil must be loaded

onto  bigger  tankers,  which  is  slow  and

costly. Chinese banks are loth to lend.

Payment  is  another  problem.  Finan­

ciers in Hong Kong, who have ample access

to greenbacks, have helped North Korea re­

ceive  hard  currency  in  the  past.  But  Rus­

sia’s energy deals would be far too large to

hide  in  the  city’s  financial  system,  says  a

trade lawyer. And its main regulator would

not  turn  a  blind  eye  to  such  dealings,  lest

they lead America to suspend Hong Kong’s

ability  to  clear  dollars  locally,  a  privilege

central to its economy.

One  fix,  however,  is  for  Russia  to  use

Chinese bank accounts within China to re­

ceive  payment in  yuan.  Those  accounts

could  then  be  used  to  finance  imports  of

essential goods, avoiding the cross­border

dimension of trade accounting.

China may also be biding its time. Even

withtheextracosts, buyingRussianoil

wouldsave lotsofmoney. AndChinese

tradersknowa bargainwhentheyseeone:

whentheoilpricenearedsingledigitsdur­

ingthecovid­induceddownturnof2020,

theystockedupto thegills.AsRussia’s

trading positionweakens,theUralsdis­

countwillgoup.SowillChina’spurchases.

Sucha movewillnotbeeasilyreversed.

Mostrefineriesare configuredto guzzle

certaintypesofcrude,meaningswitching

fromthehigh­sulphurUralsvarietyto,say,

SaudiArabia’ssuperlighttakestimeand

money.ThatinturnsuggestsRussia’spush

intoAsiaandEurope’sscrambleforsup­

plies could reshape the global market.

MuchofNorthSeaoilusuallygoeseast;

moreofitmightnowstayinEurope.The

continent  will  probably  also  buy  more

from  West  Africa  and  America,  and  crank

up its imports of sulphur­rich grades from

the  Gulf.  The  rest  of  the  world—Asia  in­

cluded—will  have  to  content  itself  with

what  Europe  does  not  want.  Oil  from  the

Tupi  field  in  Brazil  already  trades  at  twice

the premium to Brent than usual. 

The result of this more fragmented glo­

bal oil­trading system will be a structurally

higher  price  for  importers.  Until  the  war

petroleum  generally  flowed  seamlessly

from oilfields to the fuel tanks that needed

it most. Now, saysBenLuckock of Trafigu­

ra, a trading firm,thatfinely tuned system

has been disrupted.n

Going spare

Russian crude-oil exports

Source:Kpler *ExcludesCPC, a Kazakh-Russian blend

4

3

2

1

0

222

Jan Feb Mar

Total,mbarrels,seven-daymovingaverage*

2.0

1.5

1.0

0.5

0

2020 21 22

By destination, m barrels per day*

India

China