Both the Indians and Russians had high hopes from the recent visit of President Vladimir Putin to Delhi. Surprisingly, it wasn’t about the much hyped S400 Air Defense System deal signed between the countries for a whopping $5.1 billion. The chutzpah was regarding another strategic asset, which has been derailing the Indian growth story and threatening to maul its macroeconomic stability. No guesswork here as all eyes were on Russian oil assets as the October meeting concluded with a strategic push pertaining to Indo-Russia joint development of Siberian liquefied natural gas (LNG) and oil fields. Russia also reportedly offered India strategic access to its Arctic assets and its northern sea route (through the Kara strait). Despite these feel good announcements however, nothing concreate was discussed about uninterrupted supply lines. Perhaps, the arrangement which has been extended to the Chinese in the form of Eastern Siberia-Pacific Ocean Oil (ESPO) Pipeline for example, could have greatly sweetened the deal.
India’s plight with rising oil prices
Importing almost 80% of its oil, India has been negatively impacted by the rising crude prices as the Iranians, who are India’s third largest supplier – are forced out of the system. The US led sanctions on the Islamic Republic of Iran is making it difficult for the Indians to even do any kind of financial transaction with their trade partner. This is leaving India vulnerable to the vagaries of a strengthening dollar as it tries to stabilize its supplies from elsewhere. After all, at over 55%, oil imports form a big chunk of India’s burgeoning trade deficit and buying oil from other OPEC countries accentuates the problem. Russia could perhaps be the country’s last hope as the two nations primarily trade in their domestic currencies. The countries also accept payments in the form of other tradable items such as food stuff, pharmaceuticals and leather products, as an alternative payment option. This makes payment obligations for these countries far less cumbersome and onerous.
As it stands today, India consumes nearly 4.38 million barrels per day of oil and given its average GDP growth of over 7%, this figure will only go up. At 0.46 million barrels per day, Iran supplies are critical for India’s growth momentum. As Iranian oil supplies hit a roadblock, Russia can be seen as an alternative. The only problem is access, given no direct geographic connection between the two economic giants. Since all of India’s oil imports are mostly coming via tankers, proximity favors the Middle Eastern suppliers, historically. But as imports from sources further away (primarily North & South American countries as well as Nigeria) rises, Russia as an alternate source is becoming an attractive proposition.
The solution involves China, the catalyst
One solution to this problem comes in the form of a ‘pipeline’, which can provide uninterrupted supply to the Indians and China, often termed as a regional rival to India – can be the catalyst in this regard. This is because the Middle Kingdom, the world’s second largest economy is already importing nearly 1.3 million barrels per day (out of its total daily requirement of 12.7 million barrels) from Russia via dedicated pipelines.
China also by the way, geographically connects both Russia and India. The ESPO project, which is a major source of this supply – is a transit conduit of nearly 0.6 million barrels per day to China. This in turn points to the fact that this dedicated pipeline network has made Russian oil indispensable for China, which pays the former over $30 billion (in the form of payments and loans) annually for the resource. Oil price volatility has hit China as well since the resource comprises of nearly 8% of Chinese imports and Russian supplies sure help domestic stability for now.
If the 4,857 km ESPO pipeline can be extended to India, the three Asian powers may be bound in a strategic resource sharing agreement, strengthening their relations. This can be mutually beneficial given India’s existing strategic investments, including a 15% stake in Vankorneft assets in Siberia. The Power of Siberia LNG pipeline, also known as, the Yakutia-Khabarovsk-Vladivostok LNG pipeline, that runs almost parallel to the ESPO can also be extended to India as part of the partnership. Potentially, Russia can expect over $20 billion of incremental revenue by selling oil and LNG to India through a dedicated pipeline, as a base business case. Over time, as India’s appetite increases along with the support infrastructure, the business will increase further. China for its part could earn a transit fee for use of its territory under the partnership. The benefit for India will predominantly pertain to the possibility of using its domestic currency (and other tradable items) for payments, thereby avoiding the Dollar volatility. Also, India will become part of a tripartite agreement with its regional contemporaries, who are also fellow BRICS members.
News Source: Link