India’s Oil Arbitrage: The Billion-dollar Loophole that Europe Just Shut Down

For over a year, India found itself at the centre of a unique oil trade dynamic that drew attention from global markets and policymakers. As Western nations turned their backs on Russian crude following the Ukraine war, India began importing record volumes of discounted Russian oil, refining it, and exporting high-demand fuels like diesel and jet fuel around the world, including into European markets.

This setup, which many experts dubbed it an “arbitrage loophole”, but for India, it was a golden window, one that brought billions, kept inflation in check and boosted refinery margins. Now, that window is slamming shut. The European Union’s (EU) latest sanctions have zeroed in on this trade route, and what was once a strategic masterstroke is fast becoming a liability. Let’s take a closer look.

What’s the News?

In July 2025, the EU’s 18th sanctions package on Russia closed a billion-dollar loophole exploited by Indian refiners. India had been importing 1.76 million barrels per day of discounted Russian crude, refining it and exported fuels worth an estimated $15 billion annually to Europe.

The new sanctions ban the import of petroleum products derived from Russian oil, even if processed in third countries like India. The EU also lowered the Russian oil price cap from $60 to $47.60 per barrel , sanctioned 105 shadow fleet vessels and specifically targeted Nayara Energy’s Vadinar refinery, which is partly owned by Russia’s Rosneft.

India, citing energy security, rejected the new rules as “unilateral” and reflective of “double standards”. To further enforce these curbs, the G7 continues to use a price cap mechanism that restricts Western shipping and insurance services for Russian oil sold above $60 per barrel.

Impact of the EU Sanctions on India

Here are the key consequences of the EU’s 18th sanction on India:

Loss of a Key Export Market

The new sanctions place refiners Reliance Industries and Nayara Energy directly in the crosshairs. Reliance, which holds a 10-year deal with Rosneft to import over 500,000 barrels per day , had been using discounted Russian crude to generate premium margins from diesel exports to Europe.

Nayara, India’s second-largest buyer of Russian crude oil and a key diesel supplier to the EU, now faces margin pressure due to limited export alternatives. With Rosneft’s equity stake in Nayara, any future transactions will likely face regulatory hurdles. Reliance, too, must now reroute its refined products to lower-margin markets, reducing profitability.

Strategic Diversification

India now sources crude from 40 countries, up from 27 in recent years. This strategic pivot aims to reduce exposure to geopolitical volatility, but it also adds complexity. However, these alternative suppliers mostly offer benchmark-priced oil, unlike Russia’s typical $3–$5 per barrel discount.

While refiners may continue using Russian oil for domestic purposes and reserve cleaner barrels for exports, such segregation strategies come with increased logistical and blending costs. Freight charges and middleman margins also eat into arbitrage profits, further weakening India’s refining advantage.

Inflation Risks

Fuel export margins had helped India absorb global crude shocks and control inflation. Diesel, crucial for transport and agriculture, remained relatively stable due to these external earnings. With EU sanctions cutting off that buffer, domestic supply costs are expected to rise.

While refiners may delay immediate pump price hikes, increasing crude prices and rerouting expenses will push inflation upwards. The inflationary pass-through could be felt over several months, particularly in core sectors like manufacturing and food supply chains. Temporary measures such as export-linked subsidies or excise duty tweaks may soften the blow but could strain fiscal space.

Acceleration of Clean Energy Investments

India’s exposure to foreign oil shocks is reinforcing the need for energy transition. Investments in electric vehicles, green hydrogen and solar infrastructure are being ramped up. The country has already met its Paris climate commitments ahead of schedule and major refiners are now investing in domestic exploration, even though this may momentarily slow green progress.

These long-term strategic shifts aim to reduce dependency on imported fossil fuels, but a complete transition remains years away.

Widening Trade Deficit

India imported $50.3 billion worth of Russian crude in FY25, accounting for more than one-third of its total crude oil bill of $143.1 billion. Fuel exports, especially to Europe, had helped offset this import cost.

As sanctions shrink this lucrative export avenue, and India increasingly relies on costlier benchmark-priced crude, the trade imbalance is expected to grow. Without EU premiums, the current account may face greater stress, potentially weakening the rupee. The Reserve Bank of India (RBI) could be forced into difficult foreign exchange interventions as export earnings shrink and capital outflows rise.

Conclusion

India’s oil arbitrage, built on discounted Russian crude and lucrative European fuel exports, was a rare opportunity born out of shifting geopolitical winds. It allowed India to play a strategic role in the global oil trade while technically remaining in compliance with Western sanctions. But as the EU tightens the rules and demands greater transparency across supply chains, this channel is rapidly narrowing.

The development marks a turning point in global energy trade, showing that while legal gaps may exist, political will can swiftly override market incentives. Going forward, Indian refiners will need to rethink strategy, enhance operational flexibility and lean into both diversification and clean energy investments to stay resilient in a more tightly regulated oil landscape.