Trump's Abrupt Move: Shortened Deadline for Russia Oil Sanctions

In a surprise move, former U.S. President Donald Trump has shortened the deadline for imposing what he calls the most severe sanctions to date on Russian oil exports. While markets had largely dismissed his previous threats, the scale of this latest move could force investors to start pricing in the significant tail risk.

Speaking at a joint event with UK Prime Minister Keir Starmer in Scotland, Trump stated he was giving Moscow only 10 to 12 days to reach a deal to end the Russia-Ukraine conflict, or face so-called secondary tariffs (a 100% tariff on buyers of Russian oil) – a sharp reduction from the 50-day deadline he set on July 14.

Data from the International Energy Agency (IEA) shows that Russian crude oil exports in June were 4.68 million barrels per day (bpd), approximately 4.5% of global demand, and refined product exports were 2.5 million bpd. This action could therefore disrupt global oil supplies.

Will Trump Follow Through?

It's anyone's guess. Imposing secondary tariffs on Russia could lead to a surge in oil prices, which would then drive up U.S. inflation – a consequence that might give even Trump pause, despite his professed "disappointment" with Russian President Vladimir Putin.

In recent months, the Republican president has walked back several high-profile threats, including the initially announced “reciprocal tariffs” on April 2, which quickly faded due to market pressure. However, Trump has also followed through on some threats, most notably the June 22 bombing of an Iranian nuclear facility. Unlike investors' initial dismissal of the secondary tariff threat, oil prices jumped nearly 3% on Monday.

Consequently, his erratic policy toward Russia might make some investors reluctant to entirely ignore this risk.

The Effectiveness of Secondary Tariffs: An Untested Financial Weapon

The next question is whether secondary tariffs, a relatively untested and blunt financial instrument, would be effective. The answer might be yes. India, the largest importer of seaborne Russian crude oil in June, taking in 1.5 million bpd, is currently engaged in tense trade negotiations with the U.S. The nation, a key Russian client, is unlikely to want to exacerbate trade tensions with Washington and, therefore, might abandon Moscow in favor of new (undoubtedly more expensive) energy sources.

Potential Impact on the Global Oil Market

Given the current supply and demand dynamics, the potential scale of the impact of new sanctions on the global oil market is hard to overstate. The IEA expects global oil demand growth to be 700,000 bpd in 2025, the lowest since 2009. Meanwhile, supply is forecast to increase sharply this year by 2.1 million bpd to 105.1 million bpd.

The increase in supply in recent months has come largely from higher production by OPEC+ led by Saudi Arabia. The organization began in April to unwind 2.2 million bpd of production cuts and to increase production quotas for the United Arab Emirates (UAE) by 300,000 bpd.

OPEC+’s increased production naturally leads to a decline in its spare capacity, but as of June, Saudi Arabia still has 2.3 million bpd of capacity that can be brought online within 90 days, while the UAE and Kuwait have spare capacity of 900,000 bpd and 600,000 bpd, respectively.

This means that in the event of a sudden supply disruption, these three Gulf producers could relatively quickly ramp up output. But even so, the market might still struggle to remain calm if Trump imposes secondary tariffs on Russia – in part because of the uncertainty over potential retaliatory actions by Moscow.

Potential Russian Retaliation

In recent years, oil and gas export tax revenues have accounted for 30% to 50% of the Russian federal budget, the Kremlin's most important source of funding. Therefore, Putin is likely to respond forcefully to any Western measures that limit his income.

There were signs of this last week: following the enactment of new regulations, Russia temporarily banned foreign oil tankers from loading crude oil at Novorossiysk, a major Russian Black Sea port.

Loading resumed the following day, and this could have been Moscow's warning shot: it can easily take similar measures. Trump's latest threat may just be a bluff, but either way, it has shortened the fuse on a ticking time bomb – and the oil market may find it hard to ignore.