Sanctions on importers: Trump threatens buyers of Russian oil with prohibitive duties

Donald Trump has shortened the countdown to the introduction of secondary sanctions against importers of Russian oil from 50 to 10 days. According to the new ultimatum, if Moscow does not speed up the process of settling the conflict in Ukraine, then starting from August 8, goods supplied to the United States from countries that continue to purchase our "black gold" will be subject to 100 percent duties. For Russia, the consequences of such measures could be extremely painful - the budget risks losing up to a quarter of its income from the sale of hydrocarbons. However, it is not worth preparing for the worst yet: key consumers of Russian raw materials have stated that they will not refuse our energy resources, and Trump himself does not seem to particularly believe that this measure will work.

Trump made the statement about shortening the period of the ultimatum to Russia on the conflict in Ukraine on July 29 on board the plane, returning from Scotland, where at his golf club Trump Turnberry he signed a trade agreement between the United States and the European Union with the head of the European Commission Ursula von der Leyen. Consequently, duties in the amount of 100% on goods supplied to the United States from countries that continue to buy Russian oil may be introduced as early as August 8.

The American president initially issued a similar ultimatum on July 14 after negotiations with NATO Secretary General Mark Rutte. At that time, Trump proposed to extend the ultimatum deadline by 50 days, and to establish secondary sanctions against oil importers from our country from September 1. Since, as the head of the White House claims, there is no progress in the peace initiatives of Moscow and Kyiv, postponing the introduction of protective tariffs against Russia's economic partners until autumn "does not make sense."

The clarified framework of Washington's ultimatum did not cause any particular trepidation in the camp of those against whom it was directed. According to the press secretary of the Russian president, Dmitry Peskov, the Kremlin took note of Trump's statement and Moscow remains "committed to the peace process for resolving the conflict around Ukraine."

Announcing the reduction of the ultimatum period, Trump admitted that he does not care how the decision on duties will affect the oil market: American companies will increase production of "black gold" in any case. In turn, commodity traders responded with price growth: in fear of disruption of hydrocarbon supplies and emergence of energy shortages in a number of regions of the world, the cost of Brent futures for October delivery on the London ICE exchange increased by 3% and exceeded $73 per barrel.

According to experts interviewed by MK, the current largest importers of Russian oil, even in the event of official approval of the secondary sanctions announced by the American president, are unlikely to refuse further purchases of energy resources in our country. Nevertheless, certain difficulties in deliveries may arise, which will require correction and adaptation to new economic trade conditions.

- Which countries does Trump's ultimatum primarily apply to?

Natalia Milchakova, leading analyst at Freedom Finance Global:

- Trump's threat applies primarily to such major buyers of Russian oil as China and India. In the first half of the year, Russia exported more than 49 million tons of raw materials to China worth $25 billion. Although sales volumes have decreased by almost 11% compared to last year, our country remains a key supplier of "black gold" to the Chinese market.

Trump's threat may also apply to other importers receiving hydrocarbons from Russia via maritime transport routes – Turkey, the states of South and Southeast Asia, some countries in Africa, Latin America and the Caribbean.

Fedor Sidorov, private investor and financial analyst:

- The decision of the American leader will have a negative impact on the financial well-being of the EU countries, which will face a rise in the price of both crude oil and finished motor fuel by 5-10%. This will happen due to an increase in supplies from the USA, which will sell its energy resources to Europe at much higher prices.

- How will importers react to Washington's threat to impose higher duties on them - will they refuse Russian oil or continue to purchase our energy resources?

Vasily Girya, General Director of GIS Mining:

- The reaction of current buyers of Russian energy resources will most likely be restrained. Neither China nor India are interested in a head-on collision with Washington, but they will not completely refuse to purchase hydrocarbons from Russia. There is a local probability that Beijing and New Delhi will try to revise supply schemes, including through third countries or offshore trading structures, as has happened before, but such changes will most likely be of a technical nature.

Milchakova:

- The main consumers, of course, will not stop buying oil from Russia. It is just that some of them, for example, China, which is not afraid of the next American duties, will continue to import raw materials openly, while others, in particular, perhaps India, will prefer, at least at first, to accept deliveries using the Russian "shadow" tanker fleet. It is possible that in the event of sanctions, private Indian refineries will officially act as importers, from which state-owned Indian refineries will buy Russian oil.

Sidorov:

- The threats of the American president are an attempt to put pressure on the sovereignty of China and India. If New Delhi still allows the possibility of refusing Russian hydrocarbons (the country's oil and gas minister spoke about this, but his position was refuted by another relevant official), then Beijing firmly defends its independence from Washington's decisions. Until recently, the United States exported oil to China in small volumes, but China refused to purchase from American producers, preferring energy resources from our country.

India and China are extremely interested in Russian oil. It's not even about transport accessibility, but about the benefits for importers. Buying our hydrocarbons at a discount, they process raw materials into finished products, occupying their capacities and labor force, which leads to the generation of additional taxes, and then resell fuel at market prices to Europe, which formally receives products that are no longer "of Russian citizenship." By purchasing raw materials from alternative producers, India and China significantly reduce their margins. According to Bloomberg, in the second half of July, the difference between Russian Urals and the benchmark North Sea Dated brand, which is formed on the basis of the prices of five North Sea grades of "black gold," including Brent, fell to $11.45 per barrel, thereby reaching its minimum level since February 2022. That is, Russian export oil has risen in price. Importers will most likely use the situation with possible 100% American duties as a pretext to continue purchasing at a more significant discount. Apparently, these are precisely the goals that New Delhi is pursuing when it announces that state-owned refineries are suspending purchases of Russian oil due to possible sanctions from Washington.

- What real risks do Trump’s threats pose for Russia?

Weight:

- The introduction of 100% duties will negate the economic benefits of Russian oil, especially in Southeast Asia. Logistics chains, cargo insurance and dollar settlements may be at risk. This will reduce export volumes and affect foreign exchange earnings. However, much depends on the actual configuration of measures. For now, this is just a threat, not an approved sanctions package.

Milchakova:

- The American leader's threat does not pose any real risks either for Russia or for importers. Moreover, Trump himself admitted that such sanctions may not work. Even if we assume the least likely and most extreme case - the refusal of all key buyers of Russian oil to continue importing via sea transport corridors, Russia will be able to increase supplies to the domestic market, as well as expand exports via pipelines and rail to both the near (EAEU/CIS countries) and far abroad (Hungary, Slovakia, Serbia, some regions of China). Hypothetically, Russia could lose up to 20-25% of its budget oil and gas revenues. In fact, even in the most radical case, our country will remain the largest supplier of oil to the post-Soviet space, and in fact, the decrease in raw material revenues will be noticeably less. Foreign exchange earnings will decrease, since due to potential sanctions, an increasing share of Russian exports will be made in rubles. But currency will still flow into our country: domestic exporters and importers will use the services of foreign banks, and our foreign business partners will begin to open “mirror” accounts in Russian financial institutions, through which domestic businesses will be able to exchange rubles for foreign currency, and foreign companies will be able to exchange currency for rubles.

- What oil prices should we expect in the foreseeable future - until the end of the year? What will pricing depend on?

Weight:

- The dynamics of quotes will depend on the implementation of new sanctions or their waiver; as well as on the actions of OPEC+ countries; general demand from China and seasonal factors.

In the baseline scenario, Brent could remain in the $70–75 range until the end of summer, with potential growth to $78.

Milchakova:

- In August, world oil prices may fluctuate within $65-74. The quotes will be affected by restrictions on Russian raw materials supply. By the end of the year, fluctuations within $63-83 per barrel are possible, depending on the presence or absence of a surplus of oil supply on the market.