India-Russia crude deal could cushion sharp rise in fuel prices
Key government sources have ruled out a reduction in central excise duties on gasoline and diesel, even as the price review freeze during state assembly elections hurts oil companies.
Interestingly, sources said the government has drawn up a plan to cushion the impact of a sharp rise in fuel prices due to high global crude trends once the daily review freeze is lifted. Sources confirm that a crude deal with Russia at below-market rates is being sewn up as a remedy.
A reduction in the excise component in fuel costs could have allowed public sector oil companies to raise the prices of gasoline, diesel and other products without further harming the consumer. Fuel prices have remained stable since the central government cut excise duty on petrol by Rs 5 and on diesel by Rs 10 to lower retail tariffs from a record high last November.
Currently, the Center levies excise duty at 27.90 per liter on petrol and 21.80 per liter on diesel. Sources at the Ministry of Finance told India Today TV that there is no excise duty review proposal on the table at the moment.
EFFECT OF RUSSIA-UKRAINE WAR
This translated into high but stable prices for consumers despite a huge spike in crude prices following the Russian invasion of Ukraine, stable revenues for central and state governments, but in failing to pass on rising and falling international prices to domestic consumers, oil companies are experiencing an unusual expansion and contraction of their margins.
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The price of an Indian basket of crude jumped to $128.24 a barrel on March 9 from $117.39 on March 3. Crude is currently trading at $100 a barrel.
This is why, in mid-February, the estimate was that the oil companies, to arrive at a stable margin, had to increase the price per liter of fuel by Rs 5-6.
Since the Administered Price Mechanism was abandoned, public sector CMOs, including Bharat Oil Company, Indian Oil Company and Hindustan Oil Company, have been revising fuel prices daily based on the international benchmark price and rates. change.
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GROWING GLOBAL DEMAND
State-owned oil companies, which control about 90% of the retail fuel market, refine and market fuel in the country. Rising global demand for fuels after the pandemic-driven lockdowns could have secured a solid margin for the company’s refining business, but the retail price freeze has eroded margin on the marketing side.
Sources said India was considering Russian crude, which could be available at lower prices than those offered by Dubai or Brent crude after the war in Ukraine. (Image credits: Reuters)
In a now familiar practice, the government has ensured that fuel prices remain frozen at levels reached in November after excise duty cuts ahead of the 5 state assembly elections.
Sources in the government said efforts are underway to remedy the situation by exploring the possibility of taking advantage of the supply of cheaper Russian crude via a special ruble-ruble route.
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INDIA COULD TURN TO RUSSIAN ROUGH
Sources said India was considering Russian crude, which could be available at lower prices than those offered by Dubai or Ukraine’s post-war Brent crude.
A senior government source said: “The real concern following the Russian-Ukrainian conflict is about fertilizer and metal prices, not crude. There is no sanction on Russian crude. The United States has banned the import of Russian oil into its territory, while the United Kingdom and EU members plan to phase out buying from Russia. Once the Russian crude tap turns on, things will cool down.
Sources said the current deal includes the first 3 million barrels from Russia by May this year at around 20% below global benchmark prices. Discussions will likely continue regarding additional supplies.
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India, which imports 80% of its oil needs, usually buys only about 2-3% from Russia. But with oil prices up 40% so far this year, the government is considering raising that amount if it can help reduce its growing energy bill.
The chances of a crude route from Russia appeared to have improved after Oil Minister Hardeep Singh Puri had a phone conversation with Russian Deputy Prime Minister Alexander Novak last week.
The Russian Deputy Prime Minister reportedly sounded positive, saying: “Russia’s oil and petroleum product exports to India have approached $1 billion, and there are clear opportunities to increase this figure.
HOW WILL PAYMENT BE MADE?
The possibility of a rough deal between India and Russia critically depends on the payment mechanism that the two countries should put in place.
The sanctions imposed by the United States and the EU have decided the Russian central bank to exclude a number of Russian banks from the SWIFT messaging system, which in 2021 recorded a daily average of 42 million FIN messages.
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The lack of product-specific sanctions provides a window of opportunity for countries like India to devise their own payment mechanism such as the yuan and dirham as a reference for conversion in case a rupee-ruble trade mechanism would be activated.
Sources in government said that all stakeholders including the RBI, Department of Financial Services and Ministry of External Affairs in the absence of intermediary currencies like the dollar and euro are on the table for discussion. to find a viable ruble-ruble mechanism.
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One option being considered is to use convertible currencies like the yuan or the dirham as benchmarks to arrive at a conversion rate between the rupee and the rouble. Under the proposed mechanism, sources said rubles could be deposited in an Indian bank after converting them into rupees and vice versa.
Sources within the oil marketing companies confirmed that they had been alerted to the possibility of an alternative rupee-ruble conversion mechanism. (File photo)
Sources within the oil marketing companies confirmed that they had been alerted to the possibility of an alternative rupee-ruble conversion mechanism.
Sources cite past cases where a rupee-ruble link worked well.
PAST TESTED MECHANISM
In 2018, Russian state-owned mining company Alrosa PJSC tested a similar mechanism with a few Chinese and Indian clients.
In 2019, a rupee-ruble payment mechanism was initiated with customers from both countries. In the defense sector, where India is heavily dependent on Russian hardware, India will pay Russia for the five S-400 Triumph air defense systems in rupees, or just over $5.2 billion.
International trade players say the post-war hit to the ruble presents a positive climate for imports as costs are likely to fall.
Additionally, the center would discuss how the trade can be settled in rubles and rupees as a large number of Indian exporters are expecting payments of around $500 million. These payments have been blocked since the sanctions against Russian banks ended the central role that the dollar played.
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