Have you been keeping up with the Russian invasion of Ukraine? If so, you probably recall the West imposing economic sanctions on Russian exports-specifically on oil and gas exports.
As the Guardian says sanctions were imposed “Not because they were the best option, but because they were better than the other two available courses of action: doing nothing or getting involved militarily.”
But we’re not going to be evaluating the sanctions on the premise of effectiveness. Rather, we’ll be focusing on how the sanctions have impacted the oil and gas industry and how this change has lent India a higher footing in playing a part in global economic objectives.
The Economics Angle of the Conflict
Russia is one of the largest exporters of oil and petroleum products in the global market with a production of crude oil of over 10 million barrels a day.
Naturally imposing sanctions on the exports of Russian oil and gas, meaning a ban on the consumption of the same, meant some impact on the oil and gas had to be anticipated.
The extent of the impact however unfolded in the period after imposition, when the oil prices soared to an all-time high- today a 76% increase in a year, from June 10, 2021.
Why such an immense increase in oil and gas prices? That boils down to the simplest economic principle- a shortage in oil and gas, wherein the quantity demanded is greater than the quantity supplied or made available.
Oil and gas were now scarce resources, but the demand for them remained constant- the same as before sanctions. Prices, which are truly a reflection of demand, increased rapidly, as they indicated how much consumers were willing to pay to acquire oil and gas, which are essential resources and inputs.
But guess what? It is the inherent value of oil and gas in being primary inputs in the manufacturing sector, that connects rising oil and gas prices to widespread inflation.
Since industries now found it harder to afford pricey oil and gas, they were likely to cut back on the supply of their finished goods, because they wanted to maintain sustainable levels of costs of production.
And you know what a decrease in supply means—rising prices or in fancy words Cost-push inflation! At the same time, there has been speculative criticism about alternative(other than Russian-led) oil and gas supplying entities purposely cutting back on supply.
For what? To raise prices even further and slap a few more bucks on their aggregate income. And yet the purpose of the article isn’t to feed consumer condemnation, so we must reroute back to our main focus.
What you should keep in mind so forth, is that the world is experiencing exceptionally high oil and gas prices. Over the duration of the past few months, an inordinate number of foreign diplomats visited India to get a sound of the middle ground stance adopted by the country in regards to the Russian Invasion.
India’s Role
The U.S even sent a representative of Indian ethnic origins to subtly coax the country to adopt an Anti-Russian approach. Is it to be implied that the world now regards India as an entity instrumental to global politics and resolution? But while there are political reasons for the country maintaining neutrality, a lot of it can be explained from an economical angle.
You see, the sanctions on oil and gas reduced Russia’s economy by the factor of the revenue that these resources bring to the country in the form of exports.
In fact, this is the general outcome of all the sanctions.
With the value of the rouble degrading progressively, Essentially what this meant was that the national income and the level of economic activity in Russia was rapidly decreasing.
The value of the ruble fell immensely meaning its purchasing power also fell, paling in comparison to other currencies. What do we need to draw from this comprehension? Most currencies held greater purchasing power than the ruble.
This increased the aggregate or total demand for trading with Russia as it was simply cheaper to import almost anything from Russia that the country had a monopoly over, relative to the product’s price in the global market.
India’s Neutral Stance had Great Benefits
And it was precisely this understanding that possibly led India to enforce a stance regarding the Invasion that favored neither side, profiting instead from a simple economic transaction with both parties of the same benefiting together.
And so India’s maintained neutrality and continued buying cheaper oil and gas from Russia relative to global prices despite pressures from the West.
It’s difficult to justify a decision by simply thinking of it from a distanced perspective. To understand completely we need to plant ourselves in the shoes of the personnel in charge of designing India’s diplomatic decisions.
Think of it this way:
Oil and gas are commodities that aren’t easily replenishable.
Production and extraction are extensive processes themselves. One of the greatest problems however is logistical issues. Oil and gas are generally transported using pipelines that connect the world globally.
However, there is a lack of infrastructure and pipelines to provide transportation that should satisfy oil and gas demand and eliminate the shortage created by sanctions. What’s troubling is that even with pipelines these commodities tend to lose energy during transportation.
To summarize this is how rising prices pose a problem on a macroeconomic level. But there’s more to it-by which I mean the microeconomic approach.
What if India DIDNT Choose Neutrality
Citizens from varying economic households consume oil and gas in some way daily. With a large section of the Indian population sustaining low incomes, it would be difficult for them to cope with the rising prices of something as essential and basic as oil and gas.
Russian imports mean protecting the livelihoods of people and controlling internal inflation. Oil and gas itself being major and the largest imports of India, expensive oil and gas possibly could have emptied the country’s reserve, perhaps generating a deficit.
Perhaps the government could have introduced subsidies? But then again how much can be sorted out by government revenue, especially in a developing country where other critical sectors require government investment.
The lack of required intervention in these sectors could put a stop to developmental projects and contribute to internal inflation. To let the exponentially rising prices dessicate the spending of citizens in an economy already affected by the pandemic seems precarious.
Had India not assumed neutrality and continued trading cheap oil and gas from Russia, wouldn’t citizens have refrained from spending their income? Money not spent is a leakage to the economy because this is money not earned by someone and goods not produced and thus goods not consumed by anyone.
To provide even more justification, the West despite its advances continues to buy Russian oil even today and in quantities that reach an all-time zenith. In such a situation, India’s precision in recognizing the signals of the market guaranteed it one of the hottest deals ever! Rather than a question of political affiliation and taking sides, it’s just a matter of operating in the best interests of the country’s citizens.
Check out our other articles here:
Here’s an article on Body Shaming.
Here’s an article of WWDC22.
Here’s a book review on Normal People by Sally Rooney.
