India and Urals - a tricky trade!

Putin and Modi awkwardly embrace before signing Russia missile deal, New Delhi, 2018

Since the break out of “Putin’s war” in Ukraine nations around the world are being asked to take a stance; in public, through their actions and the UN Council. The vast majority of countries from around the world condemn the invasion of Ukraine, some choose to stay neutral and a handful is fine with it. The neutral countries especially the two: China and India, now find themselves in an awkward position.

Chinese elegance

The diplomacy of China is working overtime with the balancing act of staying neutral, and viewed from that angle, they are doing really well - I personally wish they would join the rest of the world, but it’s ultimately their own sovereign decision.

India, delayed puberty?

Following Indian news outlets and TV, it’s shocking to read and hear, just how much “energy” is spent discussing if India should buy more crude oil or not from Russia, the arguments more or less always lead to something in the line of: “European Union is importing way more than us, so it’s totally okay for us to buy it - ‘the west’ can just stay out of our business!".

This is a completely missed opportunity for India to rise to the occasion. For as long as I can remember India has been complaining about being; told what to do and treated condescendingly. But now all eyes are on India and she’s being regarded as a key world player! But it seems that what it ultimately comes down to: Is if it’s possible to buy some Urals on the cheap and temporarily export milk produce. This is such an incredibly shallow way of both thinking and doing business!

Let me paint a picture: Imagine you work in a company, you are one of the top dogs in the c-suite, you have not operated on this level for long - it’s new to you. Then there’s a company-wide meeting with everybody related to management; from team leads, middle managers, department heads to all of you guys. The meeting goes well, many of the managers expresses their opinions and challenges, then out of the blue one of them asks about your opinion! This is your moment to shine in front of everybody! However you had hoped you could just coast along and avoid participation (like you did when you were a middle manager), but now you find yourself with everybody staring at you asking for the question to be repeated, all the while the sweat is running down your back. Eventually to manage to stutter some unimpressive answer that’s more suitable for a junior manager. Obviously, this does not build respect in your organization and just makes your colleagues question the legitimacy of your promotion.

Lucky for India, it’s still possible to take a stance, but with every day the conflict is raging, it looks more and more like a rescue manoeuvre.

Less moral more economics

Don’t read the title of this section as criticism, it’s completely fair to focus on the economic side of things. India has lots of internal humanitarian issues such as:

  • 1.8 million homeless people1
  • 73 million people lack decent housing - living in the slums1
  • ~4500 children (< 5 years) die daily due to hunger/malnutrition2

This should be enough argumentation for prioritizing one’s own citizens!

This is very much going to be a comparison between improving trade relations with Russia or EU+US, as I don’t think nor hope India will face any sanctions. However, due to the magnitude of the worldwide impact of the Russo-Ukrainian war, it’s clear that trade relations can only be improved with one of the partners.

The following opportunities and following their costs sections should be read as India choosing to improve trade relations with Russia - which seems to be the direction it’s going!


Cheap Urals!

India’s crude oil consumption in 2021 was 4.76 million BPD5, and import from Russia was just 43400 BPD6, hence just ~0.92% came from Russia.

The low dependence is of no coincidence, Urals contains a high concentration of sulfur, which causes the refining process to be more costly and time-consuming. If the refining process is not done properly the fuel products coming out the other end will be of a low quality, which in return affects the lifespan of the applications/vehicles it’s used for. This is also why the Urals, in normal times, trade for around a $2 discount relative to Brent Crude3.

The sulfur concentration does also not help with fulfilling the BS-VI standard17, which states that from 2020 onwards both diesel and gasoline must maximum contain 10 ppm of sulfur. The standard is equivalent to the Euro VI and was implemented to combat the deteriorating air quality in the metropoles.

In March 2022 India imported 360000 BPD from Russia4, that’s an 829% increase from the mean of 2021! The absolute amount is still not much, but I believe the government is trying to gauge the reaction, of how is it going to land with other trading partners. At the time of writing Urals is trading with a discount of $323 and the rumour is that India bought it with a $35 discount! This results in a daily saving of $12.6 million - not much for a big country, but what if it’s scaled? Let’s say India decides to increase its dependence to a cool 25% making Russia the largest supplier. That would amount to an import of 1.19 million BPD and a saving of $41.65 million/day or $15.2 billion/year - that sounds a lot better, but is this even possible or what is needed?

Investments in refineries

The easiest and least costly way for India to increase Urals imports is by replacing imports from Iraq or Iran, which both is a volatile suppliers and mainly sell crude with high sulfur content. However both suppliers have to be almost completely replaced to achieve a supply of 25% - this is not handy as it’s much preferred to diversify one’s suppliers.

I believe India will find itself in a situation where around 12.5% of imports can be replaced with the Urals due to their similar characteristics. The other 12.5% needs to replace other types, which will impact the crude slates the refineries are running. Such an impact will require the refineries to either upgrade their technology or build extra capacity alltogether.

Take this with a “grain of salt”, but a modern oil refinery that can deal with Ural crude costs ~$93000/BPD7 and an upgrade will run at roughly half that ~$46500/BPD. India normally imports a mix of many grades, my estimated guess is that the average refinery runs a crude slate with 1.3 - 1.6% sulfur content, whereas the Urals being exported is between 1.6 - 2.3%18 despite its spec is 1.6 - 1.8%.

Long story short: To process the half, 0.60 million BPD, of the Urals that can’t substitute other variants, capacity needs to be found, either through upgrades or build.

Best case (upgrade): $27.9 billion / 1y 10m to breakeven

Worst case (build): $55.8 billion / 3y 8m to breakeven

Some refineries can upgrade and some need to build new plants, the real cost is somewhere in-between, for a 50/50 split between the two options it becomes a cost of 41.85 billion / 2y 8m to breakeven. This was a very naïve breakeven estimate, as it assumes money is the only obstacle, but investment projects like this take years to complete: 3, 4 or 5 years? your guess is as good as mine, but what I do know, is that the Urals needs to keep trading at a steep discount for a long time for the investment to make sense.

Technically this is only needed if you wish to keep the quality on the same fuel on the same level as normal, you can choose to ignore this, but then you pay in the form of reduced air quality in the cities leading to an increase of respiratory diseases and a shorter lifespan for the vehicle running on the fuel. The consequences are without a doubt much higher than the cost of establishing proper processing.

What about ports, storage and ships

India is already getting its oil by sea, so the harbours and storage are largely there, as more cargo will arrive from the east, there will be a need to increase capacity in Mundra, which currently receives 300000 BPD. More terminals, more storage (to a degree already happening11), but the pipeline is there!

Getting the Urals from Russia needs to arrive by ship, the most efficient way is from Kazakhstan’s CPC terminal (Caspian Pipeline Consortium) just outside of Volna, Russia to Mundra, India it takes ~14 days8 since Russia have 110 oil tankers, of which 52 are Aframaxes, at their disposal through the state-owned company Sovcomflot9, it should be possible. An Aframax can carry ~600000 barrels10, so it will take 2 takers/day resulting in the need for 28 tankers to be allocated to the Indian market. There are also independent players in the oil transportation business so the shipping capacity can be sourced.

Price inelasticity

When India closed the deal in March the Brent was hovering around $110/barrel, the Urals trades a roughly $2 discount and due to the controversial timing, India got a $35 discount, which brings the price to $73, dangerously close to Russia’s fiscal breakeven price of $69.415, leaving only $3.6 in surplus. Should the oil price fall, then Russia will find it harder and harder to give the high discount, to keep the lights on - by the way Brent crude is down to $101.5, so the same deal no would yield a deficit of $4.9, that’s unsustainable!

Exports to Russia

Sure there are some opportunities to sell products to Russia, but this is very limited. The “Economic complexity score” for Russia is 0.512 and India has 0.5613, clearly indicating the two countries are roughly on par in diversification and technological level. The unfit match is also clearly shown through their 2020 exports, India exported 1.01% of its products to Russia and Russia exported 1.8% to India, I believe the skew is mainly due to India’s reliance on Russian arms (which is declining14).

There’s not much meat for India on this topic so I will not go any further.

Opportunity costs…

Foreign direct investment (FDI)

I don’t believe India will face sanctions nor do I hope so, however the current indecisive stance is an efficient investor repellant. I’m almost certain it will be visible in this, and coming, years FDI report. In 2021 India enjoyed an FDI inflow of $52.56 billion16 of which $20.78 billion came from EU+US or in other words 39.54%. This money is used for developing India - vital for the country to improve the living standard for all.

FDI from Russia is so neglectable that it’s recorded in the aggregation “others”. But expect it to drop anyways - war is costly, especially a fierce one.

Putting a value on FDI is always difficult, as the real value is realized over time of the investment, but a rule of thumb is that the receiver benefit with about 1/3 of the value (e.g. factory needs to be built, local workers and materials are bought) during the implementation stage. The value of the thousands of direct and indirect jobs created by this FDI is in the name of simplicity omitted.

Hence the FDI is worth: $6.93 billion.

Trade partners

EU+EFTA+US accounted for $134.48 billion (35.63%) of India’s exports between April 2021 and February 202219, this is also the exports destinations with the highest trade surplus. It’s always important to have trade partners which give a trade surplus, but given India’s current deficit it’s all the more important20.

The same “rule of thumb” from above can be used to estimate, how much of the value exported originated from the exporting country.

Hence export is worth: $44.83 billion.


Would India increase its Urals import, it would directly undercut the sanctions imposed on Russia by “the west”. In effect, India would buy the Urals subsidized by “the west”. This is obviously not something you do to friends and hence India losing stature as a trade partner and a place to invest in the future.

  • It’s very unlikely India will keep getting a $35 discount per barrel from Russia in the long run, as new routes and customers are being found, the deals will be less attractive. The current discounts are needed to pull off a political theatre, to show it’s still possible to sell the Urals despite sanctions.
  • To get “bang for the buck” India needs to import significant amounts of the Urals e.g. 25% but that will require significant investments.
  • If FDI and exports to EU+EFTA+US drop just 25% (where they were just a few years ago), it will wipe out the saving of Urals but will be lasting for years.
  • India is indirectly taking a side in the conflict, this will naturally impact the relations and reduce accessibility to technologies and R&D collaboration, which India has hugely benefitted from over the last decades.
  • Russia is a terrible trade partner fit for India, with a large overlap of products, except for the oil and military sectors.

Before the opportunity for cheap oil can be taken, it might already be gone, however, the consequences is long lasting. So I hope it’s clear for everybody by now, this is a terrible deal for India, little to no upside for the country.

Sour crude oils (with high levels of sulfur) smell like rotten eggs! Urals is as sour as it gets - but now it smells in more than one way.

1 Homeless World Cup Foundation: India
2 The Hindu: No State has reported starvation deaths, Centre tells SC
3 Neste: Urals-Brent price difference
4 Financial Times: Russian oil exports to India surge as Europe shuns cargoes
5 Business Standard: India’s oil demand likely to jump 8% to 5.15 mn barrels per day in 2022
6 The Times of India: Explainer: How much oil, gas and coal India imports from Russia
7 Quora: How much does it cost to build an oil refinery and how long does it take to build one?
8 Searates: Distance and Time calculator
9 Bloomberg: Russia’s State-Owned Fleet of Oil Tankers Is Coming to a Standstill
10 EuroNav: The Basics of the Tanker Shipping Market
11 Reuters: India Oil to add 9 more oil tanks at Mundra port
12 The Observatory of Economic Complexity: Russia
13 The Observatory of Economic Complexity: India
14 Russia accounted for half of India’s arms imports during 2016-20
15 S&P Global: Russia, OPEC+ seen moving closer on fiscal breakeven oil prices
16 Reserve Bank of India: Annual FDI report - Inflows to India
17 Overview of Bharat Stage (BS) VI specifications
18 Russia to target fading Urals crude oil quality in 2018
19 India, Department of Commerce: Export: Region-wise
20 India’s Trade Deficit Rises 88% In FY22