India is now focusing on its coal reserves after purchasing inexpensive oil from Russia.

• In March, India's coal imports from Russia increased to levels not seen in over two years, as per data from commodity intelligence firm Kpler.
• The European Commission recently suggested imposing a ban on Russian coal as part of fresh sanctions against Moscow due to its invasion of Ukraine.
• Vivek Dhar from the Commonwealth Bank of Australia stated in a note that markets suspect that India and China may increase their coal imports from Russia, thereby mitigating some of the effects of the EU's formal ban on Russian coal imports.
• According to Samir N. Kapadia, head of trade at Vogel Group, the White House has fired two "warning shots" and will not fire a third if India continues to align with Russia, pressuring the country to be on the "right side of history."

Despite the global rejection of Russian products, India is increasingly focusing on Russian coal as a source of energy.

The European Commission recently suggested prohibiting Russian coal as part of a fresh set of sanctions against Moscow due to its invasion of Ukraine.

In March, India's coal imports from Russia increased to levels not seen in over two years, as per data from commodity intelligence firm Kpler.

Coal imports from Russia reached their highest level since January 2020 at 1.04 million tonnes, according to Matthew Boyle, lead dry bulk analyst at Kpler, who stated this in an email to CNBC. Over two-thirds of March's volume came from Russia's Far East ports, which is likely due to the war starting in late February.

Last week, Vivek Dhar, director of mining and energy commodities research at the Commonwealth Bank of Australia, stated that markets suspect that India and China may increase their coal imports from Russia, thereby mitigating some of the effects of the EU's formal ban on Russian coal imports.

India announced plans to increase its imports of Russian coking coal, which is used in steel production, by a factor of two.

The European Union's prohibition on Russian coal imports coincides with a tight international coal market and high prices, according to Rystad Energy. The increase in coal demand in Asia, driven by a desire to reduce the cost of natural gas imports, has caused coal prices to rise significantly in the past year.

Last Tuesday, the price of coal imported into Europe, as measured by the API 2 benchmark, surged to $300 per tonne, a significant increase from the $70 per tonne recorded in May of the previous year, according to Rystad Energy.

The lifting of tariffs on coal from Australia, as a result of the mega trade deal signed by India on April 2, is likely to ease India's coal crunch.

The removal of tariffs on over 85% of Australian goods exported to India will have its limitations, as Australia lacks the necessary coal to meet India's growing demands, according to analysts.

Coal contributes roughly 70% to India's electricity production, as per the International Energy Agency's 2021 India energy outlook report. India ranks second globally in coal consumption and imports, with China leading the way.

The U.S. Energy Information Administration reports that in 2020, 54% of Russia's coal exports went to Asia, while about 31% went to Organisation for Economic Co-operation and Development countries in Europe.

Doubling down despite ‘warning shots’ from U.S.

In 2021, India imported only about 2% of its overall goods from Russia prior to the start of the war.

According to Reuters, Indian Steel Minister Ramchandra Prasad Singh stated at a conference in New Delhi that the country is moving towards importing coking coal from Russia. He revealed that the country has already imported 4.5 million tonnes of coking coal from Russia, but did not specify the time frame.

Although the West issued warnings, India remains committed to its supply chain partnership with Russia for natural resources such as oil and coal, according to Samir N. Kapadia, head of trade at Vogel Group.

Kapadia stated that the success of the project would depend on a currency swap agreement to overcome some of the financing difficulties in the market. A currency swap line is a contract between two central banks to exchange currencies, aimed at enhancing liquidity conditions and providing foreign currency funding to domestic banks during times of market turmoil.

With a mechanism in place, India could purchase Russian energy exports and other goods despite Western sanctions limiting international payment options.

Over 11,000 banks worldwide are connected through SWIFT, but several Russian banks have been disconnected from the system.

Kapadia stated in an email to CNBC that although they believe logistical issues with shipping cannot be overcome, a rupee-rouble currency swap could aid in the process.

Kapadia stated that if India continues to purchase oil and coal from Russia, the U.S may impose sanctions and other measures.

If India continues to align with Russia, the White House may not fire another warning shot.

Recent reports indicate that top U.S. officials have cautioned New Delhi against increasing oil imports, while Washington has warned that India will face severe consequences if it aligns with Moscow.

Since the start of the war, India has been purchasing significantly more cheaper oil from Russia.

India’s increasing coal dependence

The percentage of India's coking coal import dependency has increased to approximately 85%, as stated by CBA's Dhar.

An agreement with Australia was signed this month, which could provide some relief, but its effectiveness may be restricted.

Dhar stated that Australia won't be able to provide India with the extra coking coal tonnes needed for its expanding steel production fleet due to limited supply growth.

India experienced a coal shortage towards the end of last year due to the surge in power demand.

For Australia's coking coal exports to shift away from other countries and allow India to claim a larger share, it is unlikely given that countries are now considering moving away from Russian coal, as stated by Dhar.

Dhar stated that with South Korea, Japan, and Europe seeking to reduce their reliance on Russia (approximately 10% of global coking coal exports), it becomes more challenging to argue that demand for Australian coking coal will decrease significantly from a major buyer in the near future.