India's oil import bill could rise by an estimated $9-11 billion annually if the nation is compelled to move away from importing discounted Russian crude oil due to potential penalties imposed by the United States. This development poses a threat to the profitability of Indian refiners and could exacerbate fiscal strain and inflation within the country.

Background

Since the imposition of Western sanctions on Russia following its invasion of Ukraine in February 2022, India has significantly increased its intake of discounted Russian crude. Before the conflict, Russian oil constituted a negligible 0.2% of India's imports; however, it now accounts for 35-40% of the country's total crude intake. This shift has enabled India to reduce its overall energy import costs, maintain stable retail fuel prices, and manage inflation. Moreover, the availability of discounted Russian crude has facilitated India in refining the oil and exporting petroleum products, even to countries that have sanctions on direct imports from Russia.

Trump's Tariffs and Penalties

US President Donald Trump has announced a 25% tariff on Indian goods, coupled with an additional, yet unspecified, penalty for India's continued purchase of Russian oil and military equipment. This decision has raised concerns about potential secondary sanctions that could directly impact the shipping, insurance, and financing lifelines that underpin India's Russian oil trade.

Potential Impact

If India is forced to pivot away from Russian oil, the country's import bill could surge by $9-11 billion, assuming a conservative $5 per barrel differential on 1.8 million barrels per day of displaced volumes. Some analysts estimate that the increase could even reach $13-14 billion if global prices rise further due to reduced Russian supply. This increase would not only inflate input costs for refiners but also strain fiscal balances if the government intervenes to prevent retail fuel inflation. The loss of discounted Russian barrels, typically priced $3-6 below OSP-linked Middle East grades, would erode margins, especially for diesel-focused export complexes.

EU Sanctions

Adding to the complexity, the European Union (EU) has also imposed sanctions, effective from January 2026, which may force Indian refiners to segment crude intake. The EU sanctions ban imports of refined products derived from Russian-origin crude, pressuring Indian refiners to carefully manage their crude sourcing and product flows.

Alternatives and Challenges

In response to these challenges, Indian authorities have reportedly instructed state-run refiners to explore alternative crude suppliers, including those in the Middle East and West Africa. While diversification is possible, it presents logistical, economic, and geopolitical challenges. India's dependence on imports remains high, with almost 36% of its crude oil sourced from Russia in 2024-25, valued at around $50 billion.

Industry Response

There are reports that Indian state refiners have already begun to reduce their intake of Russian crude, reflecting heightened compliance sensitivity amid mounting risks. However, private refiners, which account for over half of Russian crude imports, are better positioned to pivot toward non-Russian sources due to their trading agility and configuration flexibility.

Government Stance

Despite the pressure, India has maintained a "neutral" diplomatic posture throughout the Ukraine war. Indian officials have argued that their purchases of Russian oil have prevented a global price surge. The Indian government has stated that its energy procurement decisions are guided by supply availability in the markets and prevailing global circumstances.

The coming months will be critical in determining the extent to which US penalties and EU sanctions impact India's oil imports and overall economy. While India has options for diversification, the transition away from discounted Russian crude poses significant financial and logistical hurdles.