Business Today: Second Largest Customer Turns Away from Russian Oil Shipping Company

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The recent military campaign in Ukraine has resulted in India, the second-largest customer of Russia, severing ties with Sovcomflot PJSC, a Russian oil shipping company, due to the risks associated with sanctions. According to undisclosed sources cited by Reuters, Reliance, a major purchaser of Urals crude oil from Russia, has decided not to accept oil from Sovcomflot-owned vessels. Reliance operates the Jamnagar oil refinery, the world’s largest with a capacity of 1.24 million barrels per day, located in the Gujarat state.

Other Indian oil refineries are also planning to reject Sovcomflot vessels due to the cautious approach taken by US banks and authorities that monitor Russian oil agreements, as reported by Reuters. This marks a significant blow to Moscow’s efforts to maintain its crucial export volume.

A government source in India has communicated that New Delhi wishes to ensure that oil refineries do not source oil from sanctioned vessels for both political and commercial reasons. The Indian government will decide whether to allow sanctioned vessels, including those owned by Sovcomflot, into the country’s ports.

India has greatly benefited from Russia’s affordable energy products. However, the commercial relationship between the two countries has encountered various issues. India pays for oil purchases in Indian Rupees, which are not freely convertible and face capital flow restrictions. This means that funds from oil sales are trapped in Indian banks.

Russia has faced other obstacles in finding new markets for its largest exported commodity as it seeks to compensate for lost markets due to sanctions. Since October 2023, the US has ramped up penalties against Russia’s crude oil tanker fleet. According to Kpler, an analytics company, the number of Russian diesel oil barrels adrift at sea is the highest since 2017.

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In the current challenging trade environment, India’s refusal to purchase oil from sanctioned vessels deals a symbolic blow to the Kremlin. Simultaneously, Ukraine has commenced attacks on Russian oil refineries.

Richard Bronze, a consultant at Energy Aspects Ltd, stated, “This is an increasing squeeze on Russia’s exports, especially to India. We are now in a phase where the conflict related to sanctions is becoming very clear.”

Sovcomflot admitted this week that the sanctions have impacted its operations. Last year, the state-owned company transported approximately one-fifth of Russia’s total crude oil volume to India.

Janis Kluge, a senior associate for Eastern Europe and Eurasia at the German Institute for International and Security Affairs in Berlin, commented, “Targeting Sovcomflot reflects a significant tightening of US sanctions on Russia, increasing transportation costs and reducing Russian oil prices.”

This situation also affects Russia’s oil transportation costs. According to data from Argus Media, the cost of shipping a cargo from the Baltic Sea to China is around $14.50 per barrel. It is estimated that more than half of this amount is due to the sanctions.

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