India’s fuel exports juggernaut, once supercharged by the inflow of discounted Russian crude, is now staring down a major geopolitical roadblock. The European Union is preparing its 18th sanctions package against Moscow, and this time, it targets a lucrative workaround: refined fuels produced from Russian oil, even when processed in third countries like India. If enforced, the move could choke off a vital $63 billion revenue stream for New Delhi, upend refinery economics, and test the limits of India’s strategic neutrality in an increasingly polarised global energy landscape.
Until now, India’s refiners—particularly Reliance Industries in Jamnagar and Nayara Energy in Vadinar—have capitalised on discounted Russian Urals crude, blending geopolitical neutrality with commercial gain. Post-February 2022, Russian oil’s share in India’s import basket jumped from under 1% to nearly 40% in FY25. Indian refiners, buying Urals at $4.58–$6.77 less than Brent, reaped high margins—up to $15 per barrel—by exporting diesel, jet fuel, and gasoline to energy-hungry Europe.
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Fresh EU sanctions
This arbitrage, however, is at risk. The EU’s sanctions—motivated by Russia’s war on Ukraine—are being introduced under the Special Economic Measures Act (SEMA) and aim to block refined fuels originating from Russian crude, even if they pass through third-country refineries like those in India, Turkey, or the UAE. The proposal reflects growing frustration in Brussels over what it sees as circumvention of earlier price caps and direct import bans.
The move is also geopolitically significant. For the first time, the EU is going ahead without full G7 consensus, partly due to Washington’s waning appetite for coordinated sanctions under the Trump administration. Still, Brussels insists it will use cargo documentation and refinery disclosures to trace crude origins—despite considerable logistical and legal ambiguities in enforcement.
The numbers behind the risk
Europe has become a vital outlet for Indian fuel. In the first nine months of 2024, India exported 360,000 barrels per day (bpd) of refined fuels to the EU—a 58% increase from pre-war levels. Petroleum products now account for 14% of India’s total exports. Of this, 30% heads to Europe, with Reliance alone responsible for nearly 90% of shipments.
A complete EU ban could cut Indian export earnings by $19–$30 billion annually. Refiners may be forced to divert exports to Asia and Africa, where weaker demand and lower prices would shrink margins by 20–30%. In these regions, diesel fetches $2–$5 less per barrel. Further, compliance costs—arising from enhanced documentation and origin tracking—may add $1–$2 to per-barrel operating expenses.
This will not only erode profitability but also tighten the screws on India’s external balances. Fuel exports currently offset 20% of India’s crude import bill, which stood at $150 billion in FY25. A $19 billion hit would widen the trade deficit by an estimated 5–7%, with possible knock-on effects on the rupee and inflation.
Crude dynamics turn unfavourable
Timing could not be worse. Geopolitical instability in West Asia—especially the escalating Israel-Iran conflict—has sent Brent crude soaring past $86 per barrel. Fears of a partial blockade of the Strait of Hormuz, through which a fifth of global oil flows, are pushing freight costs up by 10–15%.
Simultaneously, India’s imports of Russian oil fell to 1.4 million bpd in February 2025, a 14.9% decline from the previous month. The drop is attributed to tighter U.S. sanctions on shipping and insurers, constraining tanker availability and raising costs by 5–7%. With the Russian discount narrowing—Urals recently traded at $70.76 per barrel, breaching the G7’s $60 price cap—the margin game for Indian refiners is fast eroding.
Forced to diversify, Indian refiners are turning to Iraqi, Nigerian, and Saudi crude—options that are 10–20% more expensive. These dynamics threaten to compress gross refining margins to $8–$12 per barrel, compared with the highs of $15–$20 during the peak of the Russian crude arbitrage.
Enforcement challenges
Despite Brussels’ intentions, the enforceability of the sanctions remains contentious. Proving the Russian origin of fuels once blended, processed, and traded through global hubs will be challenging. Industry experts argue that without a universal tracking protocol, distinguishing a Russian molecule from others is both technically and legally fraught.
Moreover, any sweeping embargo risks blowback. Europe’s energy security is still fragile. Several EU states remain highly dependent on diesel imports and may baulk at price spikes if Indian supplies vanish. At a time when inflation has resurfaced in the eurozone, energy protectionism may prove politically costly.
There’s also the risk of sanctions leakage. Like with earlier rounds, goods barred by one market may re-enter via third parties—undermining both intent and impact. Unless the EU coordinates with key Asian importers like India and China, enforcement will face inevitable loopholes.
India’s strategic recalibration
India does not recognise unilateral EU or UK sanctions, and legally, its companies are under no obligation to comply. But realpolitik and trade pragmatism may dictate otherwise. Already, whispers in diplomatic circles suggest India may not officially oppose the sanctions but could quietly recalibrate export flows.
Redirecting fuel shipments to Southeast Asia or Africa is one option, but demand remains tepid. China is a possibility, but it already buys directly from Russia at steep discounts, leaving little room for Indian middlemen. Competing with well-entrenched Middle Eastern refiners in these regions will mean shaving margins to stay competitive.
Beyond commercial implications, this episode underlines a deeper policy tension: India’s energy diplomacy is caught between geopolitical pragmatism and commercial expediency. While discounted Russian crude has offered breathing room amid volatile global prices, New Delhi now finds itself navigating a sanctions-laced trade ecosystem, where neutrality offers diminishing returns.
Inflation and domestic fallout
Domestically, the economic impact could be significant. If refiners pass on higher costs, diesel and petrol prices may rise by 3–5%, feeding into logistics and core CPI inflation. With the general election cycle looming and fuel-sensitive sectors like agriculture and transport already stretched, such price shocks carry political risk.
Worse, the fiscal cushion provided by high-margin fuel exports may disappear. If refiners cut back on exports or accept lower prices abroad, revenue collections from excise and corporate taxes may suffer. The government’s medium-term fiscal consolidation plans could come under pressure.
India’s petroleum exports have long been a strategic hedge—leveraging access to discounted crude while preserving broader Western trade ties. The EU’s planned sanctions now challenge this delicate equilibrium. As refining margins narrow, markets diversify, and sanctions harden, New Delhi must reimagine its energy export strategy.
Whether through diversification of supply sources, investments in crude-to-chemicals technology, or backchannel diplomacy with Brussels, the road ahead will demand agility and foresight. The refining loophole that once symbolised India’s geopolitical deftness may now become a liability—and perhaps, a turning point in its global energy playbook.