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The holes in EU Russia sanctions bring attention back to Trump's oil threat

EU sanctions unlikely impact Russia's oil revenues severely

India and China could continue to buy discounted Russian crude

Trump's secondary sanctions may pressure Russia, but they could also risk a global oil price spike

Ron Bousso

LONDON, JULY 22 - The latest European Union effort to restrict Russia’s oil revenues is unlikely to harm Moscow’s war effort significantly, leaving U.S. president Donald Trump’s threat of secondary sanction as one of the last remaining economic levers for pressure on the Kremlin.

The EU agreed to the 18th set of sanctions against Russia on Friday, which Foreign Policy Chief Kaja Kallas described as one of the most robust ever.

The price cap for Russian crude is now $47.60 per barrel, down from $60. This means that shippers and insurers who are trying to avoid sanctions cannot make purchases above this level. The new cap that takes effect September 3 also includes a mechanism that ensures it's always 15% below the average Russian crude price.

Import bans on refined oil products derived from Russian crude are a significant addition. The ban would most likely take effect next year and closes a loophole that was created when the EU stopped the majority of imports of Russian refined products after Moscow invaded Ukraine in February 2022. The EU's decision to halt most imports of Russian crude and refined products in the wake of Moscow's invasion of Ukraine in February 2022 led to a sharp increase in European fuel imports from China, India, and Turkey.

These initial measures were only partially effective, however, because refiners from these three countries increased their imports of Russian feedstock as a result of the price caps.

According to Kpler, India would be the largest loser of the new ban. India accounted for 16 percent of Europe's diesel and jet fuel imports last year. In 2024, India will import 38% of its crude oil from Russia.

The new ban will exempt countries who are net exporters. This means that the Gulf producers, such as Saudi Arabia and the United Arab Emirates, with their large refineries, could take over the Indian refineries' slack and export more fuel into Europe.

PAIN AND GAIN

Since 2022, Western sanctions have targeted Russia's oil industry. They are carefully designed to prevent a major energy price spike while also aiming to limit the revenues of Moscow as the third largest oil exporter in the world. The sanctions haven't had much success on this point.

In 2024, Russia's crude and oil product export revenues will reach $192 billion. This is significantly higher than the $110 billion defence budget for that year. This compares to oil export revenues of $225 billion for 2019.

According to estimates by the International Energy Agency, despite a slight decline in Russia's oil production to 7,23 million barrels a day in June, revenues rose $800 millions from May to $13.6 Billion, thanks to higher oil prices globally.

This is partly due to the fact that Russia found some workarounds. For example, it developed a vast, opaque network of oil tankers and insurance schemes, which allow Russia to export its crude oil over the price cap.

In addition to 342 tankers already sanctioned, the EU's latest package also included 105 additional tanks that had violated the original price cap.

Moscow will find ways to avoid the worst effects of these new sanctions. Perhaps by expanding its shadow fleet, or by obscuring further the source of oil with measures like mid-ocean transfers between ships.

India and China are likely to continue purchasing discounted Russian crude in order to benefit their own domestic markets while redirecting fuel exports that were previously bound for the EU towards new markets.

The new EU measures will not choke off the financial lifeblood of Moscow, even though on paper the new price cap may reduce the oil revenues in Russia.

SECONDARY TRUMP TAILORS

The "secondary sanctions" that President Trump threatened to implement last week would hit the finances of Moscow by imposing 100% tariffs on countries who buy oil from Moscow unless the Kremlin agrees to an agreement to end the conflict in Ukraine within the next 50 days.

The secondary tariffs would severely restrict the ability of any country to trade with Russia, which is the largest economy in world.

Would Trump really take such a drastic step?

Trump has been expressing frustration towards Russian President Vladimir Putin over the past few weeks. Secondary sanctions may be the only effective tool left, given that multiple rounds of EU sanctions and U.S. sanctions against Russia have not had much of an impact on Moscow’s war chest.

This is the exact problem in a global market for energy.

This drastic escalation in the West's war on Moscow would likely result in a sharp rise in the global oil price and inflation, two things that the U.S. President does not want.

It's possible that this is why, despite the recent developments, both Moscow and oil traders appear to be relatively unfazed at the moment.

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(source: Reuters)