US can squeeze Russia without ‘secondary tariffs’

Donald Trump does not need so-called secondary tariffs to crush Russia's oil revenues, currently running at $160 billion a year. The US president's recent threat to sanction countries that buy oil from Moscow is full of pitfalls. He has a better way to cut the cash flow that fuels the Kremlin's war against Ukraine.

This would be to persuade India, Russia's second biggest customer, to stop buying its oil while convincing Saudi Arabia to pump more. Doing so would ensure global crude prices do not jump as Moscow's exports fall. The US could also effectively slash the price that Russia gets for its foreign oil sales – going even further than the cut the European Union agreed last week. Together these measures would heap more trouble on President Vladimir Putin's economy, which is already facing strains from a mounting budget deficit, slowing growth, rising bad debts and still high inflation.

What's the problem with going the whole hog and stopping all of Moscow's oil exports? That is what Trump's threat to impose secondary tariffs on countries that trade with Russia is designed to achieve. He said last week that, if Putin did not end the war in Ukraine in 50 days, he would slap 100 percent tariffs on US imports from states that buy Russian exports.

Such blanket secondary tariffs would have so many drawbacks that financial markets do not believe Trump will carry out his threat. Russian equities and the rouble rose after his comments, while the crude price fell – exactly the opposite of what would have happened if investors thought he was serious.

Putin's country is the world's third biggest oil producer after the US and Saudi Arabia. It exported 7.2 million barrels a day of crude and refined products such as diesel in June for $13.6 billion, according to the International Energy Agency (IEA), implying an annual rate of just over $160 billion. Removing all this supply from the global market would push prices sharply higher. Among other things, that would hurt US consumers, damaging Trump's popularity.

Another problem is China, which bought almost a third of Russia's crude exports by volume from January to May, according to data from the Kyiv School of Economics Institute. Beijing is Moscow's most important ally. So if Trump slapped 100 percent tariffs on Chinese imports into the United States, he probably would not change its behaviour. He would merely further inflame a trade war with the world's second largest economy and push up inflation at home.

In theory, Trump could exempt China from secondary tariffs, while imposing them on other countries. India and Turkey, which respectively buy about a quarter and a tenth of Russian crude, would be the main targets. The president might have more luck twisting their arms. But a policy that penalised friendly countries while exempting the People's Republic, the United States' most serious long-term rival, would be geopolitical folly.

Fortunately, there are alternatives. Trump could use carrots as well as sticks to persuade India and Turkey to stop buying Russian oil. Washington has extensive relationships with New Delhi and Ankara on defence, trade, technology and energy. By using multiple levers, Trump could craft win-win deals with both countries.

One carrot could be to secure alternative supplies of crude oil to global markets. This would reassure India and Turkey that they would not be paying more for their energy. It would also protect US consumers from higher fuel prices.

Putin would struggle to find buyers to fully take the place of India and Turkey. By contrast, Trump has a realistic chance of getting other suppliers to fill the production gap. This would be impossible if China stopped buying Moscow's oil too.

The US president's first ports of call should be Saudi Arabia and the United Arab Emirates, as he has close relations with their leaders. They have excess oil production capacity of 3.2 million barrels a day between them, IEA data shows, which is more than what India and Turkey buy from Russia. Both are keen to increase their share of the global market.

Trump might also be able to persuade US producers, with whom he has good relations, to ramp up oil production. If there was a temporary shortfall in the market, the United States could even release oil from its strategic reserves. It could commit to refill that stockpile as new production came onstream, giving drillers confidence to increase supply.

Cutting the amount of oil Russia can export should be only part of Trump's plan. He should also squeeze the price at which Moscow sells its crude.

The EU last week cut the level at which Russia can export oil from $60 to $47.60 a barrel, taking advantage of the fact that prices have fallen since the Group of Seven wealthy countries agreed the original cap in 2022. If Trump throws his weight behind this initiative, it would be possible to go significantly lower.

To evade the cap, Moscow built up a "shadow fleet" of tankers that did not obey the price limit to transport its oil. G7 countries then imposed sanctions on some of these ships, making it harder for them to operate.

The US, which has stronger sanctions than the EU, could penalise all the tankers in Russia's shadow fleet rather than just some of them. If it can get India and Turkey to stop their Russian oil purchases, that would further drive down the price Moscow can charge.

With these measures, a price cap of around $40 a barrel may be achievable. If the volume of Russia's oil exports also fell significantly, it might be possible to halve its revenues from the black stuff.

Putin is defiant, so emptying his war chest may not be enough to force him to the negotiating table. But Trump has also promised to ramp up arms supplies to Ukraine, provided European countries pay for them. If the US president keeps his promise and Europe finds the cash, perhaps by using Moscow's $300 billion of frozen assets, Russia may eventually stop the war.