Indian public sector oil companies are facing a challenging situation after fresh US sanctions were imposed on Russian oil majors Rosneft and Lukoil. This move affects entities such as CJSC Vankorneft, a Rosneft subsidiary, in which Indian companies hold significant minority stakes. State-run ONGC Videsh Ltd (OVL) and a consortium of Oil India Ltd (OIL), Indian Oil Corporation (IOC), and Bharat PetroResources Ltd (BPRL) together own 49.9% of Vankorneft, with Rosneft retaining controlling ownership at 50.1%. [1] As the new sanctions come into effect, Indian companies are seeking legal clarity to ensure compliance and protect strategic as well as financial interests, while navigating the risk of global enforcement actions.
OFAC’s 50 Per Cent Rule and Its Relevance
The United States Treasury’s Office of Foreign Assets Control (OFAC) applies a “50 per cent rule,” meaning sanctions apply only to entities majority owned, directly or indirectly, by designated persons or entities. Under this rule Vankorneft itself is sanctioned due to controlling ownership by Rosneft, but the Indian companies with less than 50% ownership are not automatically subject to the same restrictions.[2] Nevertheless, OVL is proactively seeking domestic and international legal opinions to avoid unintentional violations, as technical breaches could have far-reaching impacts including restrictions on overseas fundraising and US dollar transactions affecting Indian firms’ global operations.
Indian Investments and Financial Stakes at Risk
The significance of the issue is marked by the substantial investments made by Indian companies in Russian oil assets. OVL holds a 26% stake in Vankorneft, while the IOC-OIL-BPRL trio holds 23.9%. Initial investments by OVL started in 2016, with the consortium acquiring stakes shortly thereafter. In total Indian firms have poured over $5 billion into these Russian assets, granting access to around 13.87 million tonnes of oil equivalent.
However, due to prior rounds of sanctions since the Russia-Ukraine conflict in 2022, these companies have been unable to repatriate dividends, which are now estimated at around $1.4 billion.[3] These funds remain parked in Moscow bank accounts, primarily at the Commercial Indo Bank (an affiliate of State Bank of India). Despite earning regular dividends in rubles, regulatory and banking hurdles leave Indian firms unable to transfer or fully utilize these earnings.
Nature of Indian Stake and Role in Vankorneft
Importantly, Indian partners in Vankorneft do not receive equity oil; rather their returns are limited to dividend income from the joint venture’s profits. The oil extracted by Vankorneft is sold to global traders, not directly routed to India. Indian companies are not field operators, limiting their practical involvement in day-to-day management, which somewhat protects them from direct operational sanctions but retains their exposure to financial and compliance risks.
Legal, Regulatory, and Strategic Ramifications
The cautious approach by ONGC Videsh Ltd seeks to prevent inadvertent sanctions violations. The legal uncertainty arises not just from OFAC’s 50% rule, but also from broader enforcement measures, potential secondary sanctions, and evolving Western policy actions. Violations could lead to Indian oil firms being shut out from accessing foreign funding or barred from conducting US dollar transactions vital for international trade.
ONGC Videsh is actively consulting law firms to clarify its obligations and map out risk-averse strategies. This includes ongoing coordination with the Indian Ministries of External Affairs and Petroleum and Natural Gas, underlining the balancing act between India’s energy security, strategic partnership with Russia, and risk-mitigation in the face of global financial regulations.
The Way Forward: Pending Resolution and Policy Implications
The issue of repatriating the $1.4 billion in stuck dividends remains unresolved.[4] While avenues such as reinvestment or using the funds in bilateral trade have been explored, operational limitations in the respective projects and cross-border payment regulations have hindered such alternatives. Industry insiders believe a major breakthrough is only likely if there is an easing of conflict in Ukraine or significant relaxation of Western sanctions.
In the meantime, the caution exercised by Indian firms exemplifies prudent risk management and adherence to international compliance, even as operational and financial uncertainties persist. The saga underscores the complexity of operating in a sanctions-laden international environment and the need for ongoing legal and diplomatic engagement.
References
- Economic Times: ONGC Videsh seeks legal advice as US sanctions hit Russian oilfield with Indian stake
- The Hindu: OVL seeks legal advice after US sanctions oilfield with Indian stake
- Outlook Business: ONGC Videsh seeks legal clarity as Russia oil sanctions disrupt trade
- Indian Express: No way out of Moscow: Why Indian oil companies’ $1.4 billion in dividends are stuck in Russia
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