Excess Oil: India's refusal to accept Russian supplies could lead to a moderate budget crisis and stagflation in Russia

On 27 August, the transition period expired, after which an additional tariff on Indian goods imported into the United States, introduced by Donald Trump as a sanction for purchasing Russian oil, came into effect.

The Indian authorities have been making provocative statements directed at Washington and declaring that they do not intend to refuse Russian supplies. However, there is no real economic logic behind this standoff: India’s losses from reduced exports to the United States would be roughly ten times greater than the savings gained from discounts on Russian oil.

At the same time, the lifting of the latest production restrictions by OPEC+ members means that the expected surplus of oil on the global market by the end of this year will be comparable to the volume of Russian supplies to India. In other words, if Indian buyers were to reject all Russian oil, the global market would remain balanced.

Should this scenario unfold, Russian export revenues will shrink by approximately $4 billion per month, or approximately $50 billion per year. This represents about 12% of Russian exports. At the same time, revenues from oil and gas exports would decline by 25-30%, and these are particularly important for filling the Russian budget.

Meanwhile, the initial annual budget revenue plan has already been reduced from 10.94 trillion roubles to 8.32 trillion, i.e. by a quarter. This target still seems achievable provided sales volumes and prices remain unchanged. However, the loss of Indian export supplies would lead to a further sharp drop.

Although the Russian authorities will be able to ease the pressure on the budget through a significant devaluation of the rouble, the sharp decline in export revenues and devaluation will lead to a reduction in imports and, as a result, to a combination of economic recession and high inflation, that is, stagflation.

That said, India’s withdrawal from Russian supplies is unlikely to happen rapidly. At present, there is not yet a sufficient surplus of oil on the global market. However, should such a threat materialise, it would push the Russian economy into a serious crisis.

Two events in August may critically influence the situation in the Russian economy. At the beginning of the month, OPEC+ countries abandoned their latest voluntary production restrictions starting from September, and on 27 August, the transition period expired, after which an additional tariff on Indian goods imported into the United States, introduced by Donald Trump on 6 August as a sanction for purchasing Russian oil, came into effect.

In its August review, the International Energy Agency (IEA) forecasts that global oil supply will grow to 2.5 million barrels per day (bpd) this year and 1.9 million bpd in 2026. OPEC+ supplies are expected to grow by 547,000 bpd in September. At the same time, the IEA has once again slightly lowered its forecast for oil demand growth. The agency expects demand to grow by approximately 700,000 bpd this year, to 103.7 million bpd. Next year, the same growth of 700,000 bpd is forecast, bringing demand to 104.4 million. As a result, a surplus of 1.8 million bpd is expected on the world market this year, and almost 3 million next year.

The surplus projected by the IEA for the end of 2025 is roughly equivalent to the volume of Russian oil imported by one of its two largest consumers – India. In July, India imported 1.5 million bpd, according to Reuters, with an average of 1.73 million bpd from January to July. Thus, if India were to replace Russian oil with Middle Eastern supplies and the corresponding volumes of Russian oil remained unsold, the global market would remain balanced even this year, let alone next year, when the supply surplus is expected to be even more substantial.

This is precisely what Donald Trump is trying to force India to do: completely abandon Russian oil. Prohibitive tariffs of 50% on most Indian exports to the US, with the exception of certain categories such as pharmaceuticals and microelectronics, will come into force on 27 August. They consist of the previously introduced 25% tariff and an additional 25% tariff on purchases of Russian oil.

So far, India has not reduced its purchases of Russian oil. On the contrary, according to Reuters sources, they are expected to rise by 10–20% in September (although this is likely due to previously signed contracts). Indian Prime Minister Narendra Modi and his ministers have issued several statements about their readiness to resist American pressure. On the day the US announced the tariffs, Modi declared his visit to China for the Shanghai Cooperation Organisation summit, his first in seven years, and later announced and held a meeting with Vladimir Putin (during which the two leaders spoke one-on-one for about an hour without leaving Putin's car).

However, according to Bloomberg's sources (and Reuters also reports the same)., negotiations between India and the United States on reducing the tariffs are still ongoing. Halting exports to the US would inflict disproportionately greater damage on the Indian economy compared with abandoning Russian oil. According to Kpler data, cited by Bloomberg, the price difference between Russian and Middle Eastern oil for Indian buyers has narrowed significantly in recent times. In May, India was paying only $4.50 less per barrel for Russian oil compared with Saudi oil, whereas in 2023 the gap exceeded $23. Thus, we are talking about only a few billion dollars in savings. According to calculations by ICRA cited by the agency, from April 2024 to March 2025, the savings amounted to just $3.8 billion. Meanwhile, Indian exports to the US total around $90 billion a year. Bloomberg Economics estimates that if the 50% tariffs remain in place, Indian exports to the US could fall by 60% (over $50 billion), and the country’s GDP could decline by 0.9%.

This is most likely why the current flare-up in rhetoric between the Indian authorities and Washington, exacerbated by a personal dispute between Prime Minister Modi and Trump (according to The New York Times, Modi rejected Trump’s request to nominate him for the Nobel Peace Prize for his help in halting the India–Pakistan conflict), will at some point be resolved by a new agreement. And it is unlikely that this agreement will mean Trump lifting the additional 'oil tariff'. Such a move would deal another blow to the American president’s reputation, weakening his position in negotiations with Putin over Ukraine. At the same time, as we have already noted, one should bear in mind that a surplus sufficient to replace Russian oil on the market will not materialise until the end of the year. Therefore, a relaxation of the 'oil tariff' or a temporary moratorium is quite possible.

Should India ultimately comply with Trump’s demands and abandon Russian oil, Russia could face potential losses exceeding $4 billion per month, or around $50 billion per year. Based on CREA data,it can be concluded that in 2025 India purchased Russian energy carriers worth an average of €3.9 billion per month, with about 80% accounted for by crude oil and around 10% by oil products. Thus, oil and oil product supplies to India represent around 12% of the total value of Russian exports (averaging $33 billion in 2025 according to balance of payments data) and 25-30% of oil and gas exports.

At the same time, finding an alternative market for the volumes supplied to India is unlikely. China reduced its purchases of Russian oil in 2025 and, in any case, lacks spare refining capacity on such a scale. Other suppliers, particularly in the Middle East, on the other hand, are interested in such a development. The disappearance of a portion of Russian oil from the market would ease price pressure and thus allow them to increase their market share and revenues. Paradoxically, Donald Trump is somewhat less interested in this outcome, as oil prices would strengthen under this scenario, whereas lower prices would help to reduce inflation in the United States.

Thus, the loss of the Indian market could result in the disappearance of more than a quarter of oil and gas export revenues, which play a particularly important role in funding the Russian budget. Meanwhile, Russian oil and gas revenues are already in decline. In July, according to the Ministry of Finance, they amounted to 787 billion roubles, 27% below last year’s level. Excluding the windfall tax on hydrocarbon production (levied quarterly), oil and gas revenues in July were only 485 billion roubles. This is less than in June (495 billion). At the same time, June’s result was already very weak – one third below last year’s figure.

Over the first seven months, according to the Ministry of Finance, oil and gas budget revenues totalled 5.5 trillion roubles; 19% less than a year earlier. Initially, the government planned to collect 10.94 trillion roubles in oil and gas revenues this year. This plan was based on a forecast average price for Urals crude of $81.7 per barrel. Oil and gas budget revenues are determined by three parameters: export volumes, the price of Russian oil and the rouble exchange rate. Falling oil prices and a strengthening rouble forced the government to make adjustments. The current version of the budget envisages oil and gas revenues of 8.32 trillion roubles, which is 25% less than the original plan. This target does not appear unattainable. According to economist Sergei Aleksashenko's forecast, the final amount may even be slightly higher, at around 8.5 trillion roubles, provided that the dynamics of volumes and prices remain the same as before in the remaining months.

A loss of more than 25% of export revenues would lead to a relatively proportional reduction in budget receipts beyond the decline already observed. Such a fall in revenues could be critical, but to some extent budgetary imbalances could be offset by a devaluation of the rouble. In this scenario, which would also require certain expenditure cuts, the budget would remain under extreme pressure and in deficit, but within manageable limits. However, this would not resolve the underlying problems of the Russian economy. The loss of such a significant share of export revenues and a sharp devaluation would reduce imports. Given the limited investment resources of the state and enterprises, this reduction would not be compensated by an expansion of domestic production to replace them. As a result, Russia would face a recession accompanied by rising prices, in other words, stagflation.