Trump threatens India with punitive tariff for buying Russian oil

India is facing a double whammy from the US President Donald Trump despite the fact that the two countries are currently negotiating a bilateral trade agreement intended to achieve ambitious outcomes.

In addition to the general tariff of 25 percent on Indian goods imported into the US, Trump has threatened to impose punitive tariff of an unspecified amount on India for purchasing crude oil and weapons from Russia.

Russia has traditionally been India’s strong trading partner. After the West imposed Sanctions on Russia following the invasion of Ukraine, China and India started to purchase Russian Urals at competitive rates.

As the world’s third largest energy importer-consumer, India imports a third of its requirement from Russia. Payment for oil import is made in Rupees. Now, with the threat of punitive tariffs, India is under pressure and it is showing.

According to reports, India’s four state-owned refineries have stopped buying Russian oil last 10 days or so; and are buying oil on the spot market in the Middle East and West Africa. Indian state-owned refineries are also desperately looking for alternatives in the event Russian oil is not available.

A majority of India’s oil imports from Russia go to the private sector refineries. In the first half of this year, almost 60 percent of the oil deliveries from Russia estimated at an average 1.8 million barrels a day went to these refineries.

To be sure, Russia accounts for a little over one-third of India’s total oil imports. In a manner of speaking Russia is India’s most important supplier. The big question that emerges therefore is whether India will be able to completely abandon Russian oil in the short-term. It seems rather unlikely.

Russia supplies almost 7 million barrels of oil per day to the world market, making the origin a significant supplier. If the entire quantity comes under sanction, the oil market fundamentals would return to serious shortage from current small surplus.

Russia is an associate member of the oil cartel OPEC and the cartel has spare capacity estimated at 4 million barrels a day. But OPEC members, especially Saudi Arabia, would be rather cautious not to take advantage of the situation. Another major origin is Iran; but that country too is facing sanctions.

So the options to replace Russian oil are extremely limited. Additionally, Trump may exert pressure on OPEC to divorce from Russia. An important point is whether countries will buckle under Trump threat or whether Trump will actually walk the talk. No one knows.

Given the uncertain situation with potential for supply disruption, oil prices face sharp upside price risk. This is not in India’s interest as it can fan inflation. Also, the Rupee has started to weaken and stands at around 87.20 to a dollar.

It’s a saving grace, the OPEC decided on Sunday to raise production of oil by 547,000 barrels a day for September. This output hike is intended to regain market share as concerns mount over potential disruptions to Russian supplies.

Reports suggest India has already started to buy crude from the US. According to data from S&P Global, India imported 271,000 barrels a day of crude oil from the US in this year's first half, up around 51 percent from 180,000 barrels a day imported in the same period in 2024.

It would make sense for India to strike a trade deal with the US as early as possible without compromising domestic interests.

The next few weeks are crucial. India should ride out this storm.