As the US Senate advances a bill enabling up to 100% tariffs on buyers of Russian energy, India faces a high-stakes trade dilemma between rising oil import bills and hit to US exports.
Earlier this week, the US Senate took steps toward passing a law that would allow the US president to impose tariffs on countries importing Russian energy. Tariffs could be as high as 100%. The two largest buyers of Russian energy are India and China. To be clear, the law allows the president to impose 100% tariffs. It does not require the president to do so.
From India’s perspective, there are two options. The first option is to stop buying Russian energy and avoid the tariff. The second option is to keep buying Russian energy and accept the tariff. Both options have political and economic implications. In this article, I will focus on the economic consequences.
Option 1: Stop Buying Russian Crude
Let’s begin with the first option. Recently, India has been buying more Russian crude. This is because of supply disruptions in West Asia. As of last month, just over half of crude imports came from Russia. India’s annual crude imports are 1.7 billion barrels. Half of that is 0.85 billion barrels.
In one scenario, India stops buying Russian crude, but other countries keep buying. This prevents oil prices from going up, as overall supply is not affected. Russian crude typically trades at a $10-$15 discount to Brent. Conservatively, switching from Russian crude would add $8.5 billion to the import bill.
In another scenario, all targeted countries stop buying Russian crude. The oil is taken off the market. Russian crude is currently 12% of the global market. The elasticity of oil prices is approximately -0.2. This means that for every 1% increase in the price of oil, demand drops by 0.2%. For global demand to drop by 12%, the price would have to rise by 60%. A price rise of this magnitude adds another $42.5 billion to the import bill. This brings the total to $51 billion.
We should think of these two numbers ($8.5 billion and $51 billion) as best- and worst-case scenarios. The true impact will be in between.
Option 2: Absorb a 100% US tariff
Let’s move to option two. What is the impact of absorbing a 100% tariff? In the fiscal year, India’s exports to USA were valued at $87.3 billion. For comparison, in the previous fiscal year, it was $92.6 billion. We can look at these two numbers to make a good guess for how tariffs affected exports.
Between FY25 and FY26, the effective tariff rate increased from 2.5% to 15%. Exports fell by 5.7%. If the effective tariff rate went up to 100%, this would imply a fall in exports of 39%, or $34 billion.
This is almost certainly an overestimate. If the actual tariff rate goes to 100%, the effective rate is usually lower (as some goods are exempt or taxed at lower rates). Some of those exports may also end up elsewhere and offset the decline.
Comparing the two options, it is not clear cut that one is better than the other. The economic impact of stopping Russian crude versus absorbing the tariff are in similar ranges.
Interestingly, the original sanctions bill would have allowed the tariff to be as high as 500%. A tariff that high would send exports to zero.
The 100% tariff would harm exports but still leave them intact. Another factor that will weigh on the choice is overall oil prices. If the West Asia conflict keeps oil prices high, it is in India’s interest to keep buying Russian crude. If the conflict ends, oil prices will drop. It then becomes easier to buy crude from alternative sources.
The Geopolitical Tightrope: Neutrality vs. Sanctions
Ultimately, the decision will also depend on the political consequences. India’s political objective is to stay neutral. (That way, it gets both Russian crude and low tariffs). The US sanctions bill is an attempt to get India to pick a side. Most likely, India will try to negotiate a lower tariff in exchange for some concessions on reducing Russian oil purchases.
