Post-US/EU sanctions, energy markets aren’t panicking; there’s other supply & India’s macroeconomy can easily adjust
This was published in the Times of India on 25 October 2025 (link).
In a change of tactics to end the Russia-Ukraine war, the US has blacklisted two Russian oil majors Lukoil and Rosneft. This is designed to prevent foreign purchases of Russian oil, including by India and China, which together buy around three-fourths of Russian seaborne oil exports. The US has also asked the EU to reduce their purchases of Russian energy, both oil and gas.
Given the magnitude of the potential disruption (Russia is after all one of the major suppliers of seaborne crude), the $4 per barrel increase in oil prices has been notably tepid, especially when compared to the spikes seen when news of such sanctions broke earlier. Even after the increase, prices are still $10 per barrel below last year’s levels, below last month’s and nearly half the peak of 2022 when the first sanctions were imposed on Russia. Even gas prices in Europe have not moved meaningfully.
Further, prices for forward oil purchases for 2026 and 2027 remain below current levels, and well below that seen last month, implying that markets expect Russian supply to resume after a short disruption.
It is tempting to ascribe the energy markets’ indifference to the volatility in US govt policies, past inability to enforce sanctions, and an expectation that these sanctions are temporary, and only a tactic to get Russia to the negotiating table. However, other factors are at play too, in both supply and demand.
Last week, before these recent sanctions, the International Energy Agency (IEA) had forecast 4mn barrels per day of oil oversupply in 2026, more than the daily Russian seaborne supply of around 3.5mn to 4mn barrels. The spare capacity in OPEC, an oil cartel, itself is more than 3mn barrels per day, of which 2mn is with Saudi Arabia. Brazilian and Guyanese supply is also set to rise next year.
In addition, whereas rig count in US has shrunk meaningfully this year due to falling oil prices, given that for many producers, costs are around $60 per barrel, any price spike could drive US supplies higher as well. Similarly, for gas, where liquified natural gas (LNG) is replacing Russian piped gas for Europe, US LNG exports hit a record high in 2025 and are forecast to rise again in 2026.
Markets may also be taking comfort from US interests in keeping oil prices capped. In 2022, to prevent a global oil price shock that would hurt US consumers as well, the US and the EU had set a price cap of $60 per barrel on Russian oil and asked India to purchase. If oil prices were to rise meaningfully, it is reasonable to expect that US will force supplies up.
On the other hand, China’s aggressive electrification is hurting oil demand. The Rhodium group estimates that China’s total electric vehicle fleet is already displacing more than 1mn barrels per day in implied oil demand, and this could reach 1.76mn next year. Cumulatively this would be nearly 10% of China’s oil demand in 2025. The structural nature of this shift creates incentives for oil producers to maximise their revenue while demand exists, as prices could fall meaningfully going forward.
As discussed in this column on Aug 2, the specific loss for India from stopping Russian oil purchases was only $1bn-2bn annually (see ‘No Putin Oil? Bad News, for Trump’). The bigger risk would be if global oil prices spiked if Russian oil was shut out of global markets.
These risks appear to have abated in the last three months, as discussed above, given a slow global economy, rising supply, and growing electrification in China.
Nevertheless, if sanctions stay for several months, it would be reasonable to expect further price increases. A useful rule-of-thumb to estimate the impact is that each dollar per barrel increase in oil price costs the Indian economy around $1.7bn annually. As current prices are well below what they were in Oct last year, India’s macroeconomic balance or growth would only be affected meaningfully if prices rise above $85 per barrel and stay elevated for a year or more.
Can there be pressure on the currency in the interim if oil prices rise further? Govt’s fiscal discipline has limited India’s current account deficit (CAD: the difference between total production and consumption in the economy) to around 1% of GDP. This level of deficit is possible to finance even when global capital flows have slowed.
There is a possibility that CAD widens in coming quarters as growth revives. In the last fiscal, Indian economy grew 6.5% despite fiscal consolidation of nearly 1.3% of GDP and monetary tightening affecting growth by another 2.5% of GDP. As the pace of fiscal consolidation slows, and monetary easing boosts credit growth, economic growth is reviving, and the momentum is likely to improve over the next few quarters. This can potentially widen CAD, as imports are boosted by improving domestic demand, but export growth is constrained by global headwinds.
However, capital flows to India are also growth dependent. Many foreign investors shifted away from India in recent months believing it was an ‘AI loser’ and towards Taiwan, Korea and China, seen as ‘AI winners’. They seem to have conflated a monetary and fiscal downcycle with a structural problem, forgetting that an upturn in the business cycle is much more powerful than any near-term impact of AI. As evidence of growth revival builds, so should capital inflows, limiting pressure on the currency.