The Russian takeover of the Crimea could have serious geo-political consequences, triggering convulsions in the global energy markets. As a major importer, India is quite vulnerable to this possibility. India would also be adversely affected if a situation arose where the EU or the US imposed serious escalating sanctions against Russia as a nation. As of now, only individual Russians (and a few Ukrainians) have been targeted in sanctions by the EU and US.
India was an ally of the former Soviet Union and is still very friendly with Russia (and also with the Ukraine). India has a lot of bilateral trade with both nations. Among other things, India sources much of its military gear from Russia (and some military gear from the Ukraine).
India's ONGC Videsh Limited (OVL) also has stakes in the Russian oil industry, owning assets such as an equity stake in the Sakhalin I project. Serious sanctions would put India under pressure to exit Russian assets. This could also hit bilateral trade since it would make it difficult to transfer monies through the global banking system.
Russia is one of the world's largest oil and gas exporters. If Russia decides to retaliate against sanctions on the economic front, it could well do so by cutting off pipelined gas supplies to western Europe or Ukraine. About one-third of EU's gas comes from Russia and nearly half of that is piped via the Ukraine.
This would raise the price of gas in Europe. In fact, just the fear of supply disruption could push crude and gas prices up. The US, which has made major progress in exploiting shale gas and tight oil resources, is considering easing export restrictions, to balance off any such possible impact. A rise in global crude and gas prices would hurt India in multiple ways. As a major importer, India would suffer if the crude and gas bill rises. India has already been through an extended version of this problem with Iran, which has suffered severe sanctions for many years. Paying Iran for crude and gas imports is a problem; joint ventures to exploit Iranian energy assets is also hard since operations in Iran more or less automatically debar an Indian JV partner from operating in the US and EU. Even now, after sanctions have been conditionally eased, India is still struggling to settle payments with Iran and it has been forced to cut back on its Iranian imports.
If there is a sharp spike in global crude and gas prices, the Current Account Deficit will swell. The rupee would come under pressure. The Fiscal Deficit would also be hit because the fuel subsidy mechanism is not geared for a rise in crude prices and the subsidy would rise. Given the timing, all this could come to a head while India is essentially running on autopilot without a government.
At the corporate level, the oil-marketing PSUs such as BPCL, IOC and HPCL would come under pressure all over again. The oil producers such as ONGC and OIL may also come under pressure since they would be asked to share the subsidy to the OMCs. Cairn, which is a private-sector producer, and not compelled to share the subsidy burden, would probably be a beneficiary of higher prices. It is an open question what would happen with respect to the pricing of domestic gas, if international prices shot up.
It is very difficult if not impossible to assess the probability of such events. One would have to assess the chances of escalating sanctions, and also of rising crude and gas prices in case Russia responds aggressively to sanctions, or more generally if the markets are afraid of strong Russian reactions. Different people will assign different probabilities to such events.
However, if some of these events do occur, the trader should not be caught flat-footed. Don't be surprised if a bull run in Indian equity is suddenly interrupted by a zoom in crude or natural gas prices. In such circumstances, be prepared to short PSUs and go long on crude oil in the commodity futures markets.
India was an ally of the former Soviet Union and is still very friendly with Russia (and also with the Ukraine). India has a lot of bilateral trade with both nations. Among other things, India sources much of its military gear from Russia (and some military gear from the Ukraine).
India's ONGC Videsh Limited (OVL) also has stakes in the Russian oil industry, owning assets such as an equity stake in the Sakhalin I project. Serious sanctions would put India under pressure to exit Russian assets. This could also hit bilateral trade since it would make it difficult to transfer monies through the global banking system.
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Russia has a veto at the UN Security Council, which it has already used to prevent UN-backed sanctions. But the EU and the US could impose sanctions anyhow against the nation. India would then be placed in an awkward position. India would be extremely reluctant to go along with sanctions, and has already stated that it will not support "unilateral sanctions". But India would also not like to risk punitive action by from America or the EU if it refused to go along.
Russia is one of the world's largest oil and gas exporters. If Russia decides to retaliate against sanctions on the economic front, it could well do so by cutting off pipelined gas supplies to western Europe or Ukraine. About one-third of EU's gas comes from Russia and nearly half of that is piped via the Ukraine.
This would raise the price of gas in Europe. In fact, just the fear of supply disruption could push crude and gas prices up. The US, which has made major progress in exploiting shale gas and tight oil resources, is considering easing export restrictions, to balance off any such possible impact. A rise in global crude and gas prices would hurt India in multiple ways. As a major importer, India would suffer if the crude and gas bill rises. India has already been through an extended version of this problem with Iran, which has suffered severe sanctions for many years. Paying Iran for crude and gas imports is a problem; joint ventures to exploit Iranian energy assets is also hard since operations in Iran more or less automatically debar an Indian JV partner from operating in the US and EU. Even now, after sanctions have been conditionally eased, India is still struggling to settle payments with Iran and it has been forced to cut back on its Iranian imports.
If there is a sharp spike in global crude and gas prices, the Current Account Deficit will swell. The rupee would come under pressure. The Fiscal Deficit would also be hit because the fuel subsidy mechanism is not geared for a rise in crude prices and the subsidy would rise. Given the timing, all this could come to a head while India is essentially running on autopilot without a government.
At the corporate level, the oil-marketing PSUs such as BPCL, IOC and HPCL would come under pressure all over again. The oil producers such as ONGC and OIL may also come under pressure since they would be asked to share the subsidy to the OMCs. Cairn, which is a private-sector producer, and not compelled to share the subsidy burden, would probably be a beneficiary of higher prices. It is an open question what would happen with respect to the pricing of domestic gas, if international prices shot up.
It is very difficult if not impossible to assess the probability of such events. One would have to assess the chances of escalating sanctions, and also of rising crude and gas prices in case Russia responds aggressively to sanctions, or more generally if the markets are afraid of strong Russian reactions. Different people will assign different probabilities to such events.
However, if some of these events do occur, the trader should not be caught flat-footed. Don't be surprised if a bull run in Indian equity is suddenly interrupted by a zoom in crude or natural gas prices. In such circumstances, be prepared to short PSUs and go long on crude oil in the commodity futures markets.