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What is the story about?
India could face higher energy costs and pressure on exports if the US imposes tariffs linked to Russian oil imports, but businesses are better prepared than they were during the previous tariff episode, according to industry experts.
G Krishnakumar, former Chairman and Managing Director of BPCL, said India's immediate challenge would be replacing discounted Russian crude if imports are reduced. While Indian refiners can process crude from other sources, the commercial impact could be significant, leading to higher inflation and pressure on the current account.
Krishnakumar noted that India imported around 35% of its crude from Russia over the last 12 months, with the share rising to nearly 50% in July. He said replacing those volumes would be difficult given the current geopolitical environment and supply constraints.
"The commercial impact will be too high to handle, and there will be an impact on the current account as well as inflation," he said.
He said if India and China enter the market to replace Russian crude, global oil prices could rise sharply, putting pressure on refinery margins and prompting the government to prioritise domestic fuel supplies over exports.
On the export side, Sivaramakrishnan Ganapathi, Vice Chairman and Managing Director of Gokaldas Exports, said Indian exporters have already started preparing for any tariff-related disruption.
Ganapathi said the company successfully navigated the previous 50% tariff episode without losing export volumes, although margins were affected. This time, he believes businesses are in a stronger position due to better planning and market diversification.
He added that Gokaldas Exports is reducing its dependence on the US market by expanding into Europe, the UK and Africa through free trade agreements and duty-free access.
While uncertainty remains over whether the US will impose higher tariffs, Ganapathi said exporters are far better prepared than they were during the previous tariff shock.
This is an edited transcript of the interview.
Q: Can you explain the ecosystem that we are delving into? What is the extent to which we are dependent on Russia, and if we have to reduce it to zero, what are the implications for India and the world?
Krishnakumar: Let me put into perspective what the law is all about. After Trump signed the law on the 18th of this month, two things come into play. If you look at the law, you can look at it as two levers. One is the sanctions. Sanctions mean there will be freezing of assets and a ban on transactions with anyone dealing with named Russian entities. But we have been dealing with intermediaries which are outside the sanctions. That's number one.
Number two is that the Act says Trump has the authority to levy tariffs beyond 30 days if he so desires. The operative word is that it's not automatic. It can kick in after 30 days if he so desires, based on certain circumstances.
Actually, it's not only him; a committee will decide the tariffs to be imposed.
So what happens? India has been importing about 50% of its crude in July, but overall, if you look at the preceding 12 months, about 35% of our crude imports have come from Russia.
So, what are the alternatives? Russia gives us crude at a good discount. With the Hormuz crisis still in place, we will find it difficult to replace those volumes. India and China are the two major countries that can be affected by this Act. Together, we import about 5 million barrels per day.
To replace that kind of volume, and to get a discount, there will be a significant impact. The impact is not on oil alone. It will also affect our exports of goods to the US. Our goods will become costlier, and they will not be attractive in the US market. So far, we have been able to manage the current tariffs, but these tariffs will be over and above the current tariffs, which stand at 50%. So, they can even go up to 150% if the full tariff blow is dealt to the country.
So, what are the options available? There is a small clause which says anybody who imports Russian natural gas at less than 15% of their annual imports may get a waiver from tariffs. Also, the President can waive them if there are significant efforts being made to reduce imports of Russian natural gas alone. But it does not apply to crude oil.
So, what are the options available to us? We'll have to reduce our consumption of Russian oil and look for alternative sources. The alternatives available are West Asia, the US, and other sources.
Frankly, India has diversified its sourcing options, so we have good energy security there. Also, all our refineries are operationally capable of handling any crude other than Russian crude. But the commercial impact will be too high to handle, and there will be an impact on the current account as well as inflation.
So, I suggest that as long as there is a reduction in Russian oil imports and negotiations take place to handle this tariff, we will be better off. Otherwise, we stand to get into trouble in the long run.
Q: Some calculation has been done on this 30% dependence on Russia, and apparently the discount was between $3 and $8, depending on the time. So, people are calculating about $3 billion to $5 billion in higher energy bills, at the very least, not counting the hit on...
Krishnakumar: But what you need to understand is that when these discounts disappear from the market, and we start looking for crude oil outside, the premium will be much more than this loss. So, there will be a compounded impact.
Q: I want to understand the implications for exports as well. Sivaramakrishnan, what is your sense? The US had already imposed a 50% tariff, and we escaped it because of the courts. Otherwise, they were willing to go with that. Do you think that will be the scenario? If not 100%, definitely higher than what we have now. And if that happens, what is the impact?
Ganapathi: It's hard to predict how all of this will unfold over a period of time. We had, in the early part of the last financial year, or the middle of the last financial year, a 50% tariff. As exporters, we did navigate through that without any drop in our export volumes whatsoever. Of course, we took a hit on our margins, but we did keep our business completely intact.
So, this time around, we have to see how this will manifest. Would there be a tariff on account of Russian oil imports? At this point, with high US inflation as well as the midterm election in the US, I am not so sure there will be an immediate impact from a tariff on India. That's the impression I'm getting, and only time will tell.
There is also a 30-day period that this Act imposes. As of now, when I talk to my US buyers, they are not panicking. They are staying strong, and our business for the rest of the financial year is fully booked. So, from that perspective, we are not in a panic mode whatsoever.
Moreover, from a business perspective, we are also saying, "Let's protect ourselves from any such eventuality because that's always good to de-risk the business." With the African Growth and Opportunity Act (AGOA) kicking in for the longer term, a substantial portion of our revenues is anyway duty-free. About 20% of our revenue, which comes from Africa, is duty-free. With the UK FTA already in place and the European FTA expected, we are diversifying aggressively to Europe.
So today, if you look at the revenue at risk for us, it's the 50% of our revenue which comes from India to the US. That over a period of time, will reduce to about 25% to 30% because we will be stepping up our European business.
So overall, I think the game plan for Gokaldas is to move almost 70% of our revenue to duty-free markets, with the US being catered to from Africa, while Europe and the UK are catered to largely from India, so that we reduce our dependence. This will take about three years.
In the meantime, just like we fought through that earlier 50% tariff phase, we are readying ourselves for the eventuality, though I feel that the possibility of that is pretty low at the moment.
Q: If India moves out completely from Russian imports and depends on other countries, the expectation is that crude prices could jump by a good $10 because we are big buyers. Secondly, we are also the world's biggest refiner now. We are exporting petrol and diesel in a big way, and that directly hits the American voter. If petrol and diesel prices go up, which will happen if India doesn't refine Russian crude, can you give us some estimates on how much you expect crude prices to jump if we move out of Russia? Also, by how much could petrol and diesel prices increase if we stop refining Russian crude?
Krishnakumar: Crude prices largely depend on the supply sources. It depends on how much supply you have, and it depends on the level of demand.
So, if Russian crude supplies go down, China and India will be in the market for replacement crude. In that case, while we can manage the volumes required for refining, the margin pressure will be very high.
Operationally, we can handle it. We can handle any crude, and we will get the crude as well. But the margin pressure will be high, and gross refining margins (GRMs) will take a hit.
Internationally, crude prices can go up to $150 or more, depending on demand and supply. In that case, the Government of India will prioritise domestic supplies.
So, supplying to the West will be a major issue because the refined products will be made available to India, as the government has done in the past. It will bring in restrictions on exports. So, there will be an issue there.
Q: I can see how Gokaldas has hedged its bets. I can also see how India has hedged its bets with all those FTAs. Would you generalise that for most Indian exporters? Would you say that everybody is much less impacted than they were during that Liberation Day horror story?
Ganapathi: So, it all depends on how much the tariff is and how long it is imposed. I think everybody is far more prepared than they were last time. Last time was a surprise; it was unanticipated, and we were caught like deer in the headlights.
But this time around, there has been a good deal of planning and preparation, and long-term strategic plans are also being drawn up.
So, I think most exporters would be planning to pivot if need be.
For the full interview, watch the accompanying video
Catch all the latest updates from the stock market here
G Krishnakumar, former Chairman and Managing Director of BPCL, said India's immediate challenge would be replacing discounted Russian crude if imports are reduced. While Indian refiners can process crude from other sources, the commercial impact could be significant, leading to higher inflation and pressure on the current account.
Krishnakumar noted that India imported around 35% of its crude from Russia over the last 12 months, with the share rising to nearly 50% in July. He said replacing those volumes would be difficult given the current geopolitical environment and supply constraints.
"The commercial impact will be too high to handle, and there will be an impact on the current account as well as inflation," he said.
He said if India and China enter the market to replace Russian crude, global oil prices could rise sharply, putting pressure on refinery margins and prompting the government to prioritise domestic fuel supplies over exports.
On the export side, Sivaramakrishnan Ganapathi, Vice Chairman and Managing Director of Gokaldas Exports, said Indian exporters have already started preparing for any tariff-related disruption.
Ganapathi said the company successfully navigated the previous 50% tariff episode without losing export volumes, although margins were affected. This time, he believes businesses are in a stronger position due to better planning and market diversification.
He added that Gokaldas Exports is reducing its dependence on the US market by expanding into Europe, the UK and Africa through free trade agreements and duty-free access.
While uncertainty remains over whether the US will impose higher tariffs, Ganapathi said exporters are far better prepared than they were during the previous tariff shock.
This is an edited transcript of the interview.
Q: Can you explain the ecosystem that we are delving into? What is the extent to which we are dependent on Russia, and if we have to reduce it to zero, what are the implications for India and the world?
Krishnakumar: Let me put into perspective what the law is all about. After Trump signed the law on the 18th of this month, two things come into play. If you look at the law, you can look at it as two levers. One is the sanctions. Sanctions mean there will be freezing of assets and a ban on transactions with anyone dealing with named Russian entities. But we have been dealing with intermediaries which are outside the sanctions. That's number one.
Number two is that the Act says Trump has the authority to levy tariffs beyond 30 days if he so desires. The operative word is that it's not automatic. It can kick in after 30 days if he so desires, based on certain circumstances.
Actually, it's not only him; a committee will decide the tariffs to be imposed.
So what happens? India has been importing about 50% of its crude in July, but overall, if you look at the preceding 12 months, about 35% of our crude imports have come from Russia.
So, what are the alternatives? Russia gives us crude at a good discount. With the Hormuz crisis still in place, we will find it difficult to replace those volumes. India and China are the two major countries that can be affected by this Act. Together, we import about 5 million barrels per day.
To replace that kind of volume, and to get a discount, there will be a significant impact. The impact is not on oil alone. It will also affect our exports of goods to the US. Our goods will become costlier, and they will not be attractive in the US market. So far, we have been able to manage the current tariffs, but these tariffs will be over and above the current tariffs, which stand at 50%. So, they can even go up to 150% if the full tariff blow is dealt to the country.
So, what are the options available? There is a small clause which says anybody who imports Russian natural gas at less than 15% of their annual imports may get a waiver from tariffs. Also, the President can waive them if there are significant efforts being made to reduce imports of Russian natural gas alone. But it does not apply to crude oil.
So, what are the options available to us? We'll have to reduce our consumption of Russian oil and look for alternative sources. The alternatives available are West Asia, the US, and other sources.
Frankly, India has diversified its sourcing options, so we have good energy security there. Also, all our refineries are operationally capable of handling any crude other than Russian crude. But the commercial impact will be too high to handle, and there will be an impact on the current account as well as inflation.
So, I suggest that as long as there is a reduction in Russian oil imports and negotiations take place to handle this tariff, we will be better off. Otherwise, we stand to get into trouble in the long run.
Q: Some calculation has been done on this 30% dependence on Russia, and apparently the discount was between $3 and $8, depending on the time. So, people are calculating about $3 billion to $5 billion in higher energy bills, at the very least, not counting the hit on...
Krishnakumar: But what you need to understand is that when these discounts disappear from the market, and we start looking for crude oil outside, the premium will be much more than this loss. So, there will be a compounded impact.
Q: I want to understand the implications for exports as well. Sivaramakrishnan, what is your sense? The US had already imposed a 50% tariff, and we escaped it because of the courts. Otherwise, they were willing to go with that. Do you think that will be the scenario? If not 100%, definitely higher than what we have now. And if that happens, what is the impact?
Ganapathi: It's hard to predict how all of this will unfold over a period of time. We had, in the early part of the last financial year, or the middle of the last financial year, a 50% tariff. As exporters, we did navigate through that without any drop in our export volumes whatsoever. Of course, we took a hit on our margins, but we did keep our business completely intact.
So, this time around, we have to see how this will manifest. Would there be a tariff on account of Russian oil imports? At this point, with high US inflation as well as the midterm election in the US, I am not so sure there will be an immediate impact from a tariff on India. That's the impression I'm getting, and only time will tell.
There is also a 30-day period that this Act imposes. As of now, when I talk to my US buyers, they are not panicking. They are staying strong, and our business for the rest of the financial year is fully booked. So, from that perspective, we are not in a panic mode whatsoever.
Moreover, from a business perspective, we are also saying, "Let's protect ourselves from any such eventuality because that's always good to de-risk the business." With the African Growth and Opportunity Act (AGOA) kicking in for the longer term, a substantial portion of our revenues is anyway duty-free. About 20% of our revenue, which comes from Africa, is duty-free. With the UK FTA already in place and the European FTA expected, we are diversifying aggressively to Europe.
So today, if you look at the revenue at risk for us, it's the 50% of our revenue which comes from India to the US. That over a period of time, will reduce to about 25% to 30% because we will be stepping up our European business.
So overall, I think the game plan for Gokaldas is to move almost 70% of our revenue to duty-free markets, with the US being catered to from Africa, while Europe and the UK are catered to largely from India, so that we reduce our dependence. This will take about three years.
In the meantime, just like we fought through that earlier 50% tariff phase, we are readying ourselves for the eventuality, though I feel that the possibility of that is pretty low at the moment.
Q: If India moves out completely from Russian imports and depends on other countries, the expectation is that crude prices could jump by a good $10 because we are big buyers. Secondly, we are also the world's biggest refiner now. We are exporting petrol and diesel in a big way, and that directly hits the American voter. If petrol and diesel prices go up, which will happen if India doesn't refine Russian crude, can you give us some estimates on how much you expect crude prices to jump if we move out of Russia? Also, by how much could petrol and diesel prices increase if we stop refining Russian crude?
Krishnakumar: Crude prices largely depend on the supply sources. It depends on how much supply you have, and it depends on the level of demand.
So, if Russian crude supplies go down, China and India will be in the market for replacement crude. In that case, while we can manage the volumes required for refining, the margin pressure will be very high.
Operationally, we can handle it. We can handle any crude, and we will get the crude as well. But the margin pressure will be high, and gross refining margins (GRMs) will take a hit.
Internationally, crude prices can go up to $150 or more, depending on demand and supply. In that case, the Government of India will prioritise domestic supplies.
So, supplying to the West will be a major issue because the refined products will be made available to India, as the government has done in the past. It will bring in restrictions on exports. So, there will be an issue there.
Q: I can see how Gokaldas has hedged its bets. I can also see how India has hedged its bets with all those FTAs. Would you generalise that for most Indian exporters? Would you say that everybody is much less impacted than they were during that Liberation Day horror story?
Ganapathi: So, it all depends on how much the tariff is and how long it is imposed. I think everybody is far more prepared than they were last time. Last time was a surprise; it was unanticipated, and we were caught like deer in the headlights.
But this time around, there has been a good deal of planning and preparation, and long-term strategic plans are also being drawn up.
So, I think most exporters would be planning to pivot if need be.
For the full interview, watch the accompanying video
Catch all the latest updates from the stock market here
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