On Monday, U.S. President Donald Trump vowed to slap India with extra tariffs because, "They're fueling the war machine," by buying Russian oil. Well, Trump made good on his threat on Wednesday, signing an executive order imposing an additional 25% tariff on India. The new tariff stacks on top of the existing 25% on Indian exports to the United States, and will come into effect in 21 days.
Last year, India leapfrogged China to become the biggest buyer of Russian oil, purchasing up to 2 million barrels of discounted barrels per day, good for ~2% of global supply. India bought Russian oil worth $50.2 billion in fiscal year 2024/2025, accounting for 35% of its oil imports.
It’s not just that India is buying “massive amounts of Russian Oil”, said Trump, but “they are then, for much of the Oil purchased, selling it on the Open Market for big profits… Because of this, I will be substantially raising the Tariff paid by India to the USA.”
And now, Wall Street is warning that putting the clamps on Russia’s top customer is likely to have some dire consequences.
According to JP Morgan, Russia could retaliate by closing Kazakhstan’s Caspian Pipeline Consortium (CPC), which western oil majors, including Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Shell (NYSE:SHEL), TotalEnergies (NYSE:TTE) and Eni S.p.A. (NYSE:E) used to export 1 million barrels of crude per day. CPC has a total capacity of 1.7 million b/d.
There are hints that Moscow is getting ready to act: Last month, Russian President Vladimir Putin signed a decree that requires all foreign vessels to obtain permission from the Federal Security Service of the Russian Federation (FSB) before entering Russian seaports. The FSB has the authority to grant or deny passage. Novorossiysk, which handles oil flowing through CPC, is one of the ports affected.
Russia could find itself in a world of hurt, too, with the loss of 2 mb/d in crude exports likely to force the country to pare back its current production level of 9 million b/d. This would, obviously, hurt the country’s coffers pretty badly at a time when Russia is already reeling under falling oil prices. According to data by Russia’s finance ministry data, the country’s oil and gas revenue fell 33.7%Y/Y in June to a 16-month low. Russia’s revenue from oil and gas sales are estimated to have declined 37% Y/Y in July thanks to a strong ruble and weak oil prices.
"Cutting off this flow would require a massive realignment of trade flows," BNP Paribas analysts Aldo Spanjer told Reuters, pointing out that global oil supply is already stretched. Russia might have some options. According to the analysts, Russia could divert around 800,000 bpd of oil to Egypt, Pakistan, Malaysia, Peru, Indonesia, Brunei and South Africa. The analysts estimate that the combined effects of the stoppage Russian flows to India and CPC flows would disrupt 3.5 million bpd, with Sparta Commodities analyst Neil Crosby estimating that this would trigger an oil price spike to above $80 per barrel.
According to a Wednesday briefing from Standard Chartered, if Indian refiners “cannot source a near alternative, any deviation from the optimal crude slate will cause operational inefficiencies and lower refined product outputs, and the elasticity of substitution is lower than the market often estimates”. (Russian Urals is a medium-sour that has high diesel yields in refining).
Citing research by Baker & O’Brien, StanChart notes that “a full-conversion complex refinery could experience a 7% reduction in distillate production if it switches from Russian Urals to WTI as Urals generates more feedstock residue for hydrocracking, catalytic cracking and coker units; in contrast WTI would produce less diesel, fuel oil and jet fuel, but larger volumes of gasoline.”
Meanwhile, Kazakhstan finds itself in the crossfire of the unfolding trade war, with the country’s economy heavily dependent on oil exports. Unfortunately, Kazakhstan is highly vulnerable to a shut down of CPC due to the lack of viable alternatives. Whereas it could turn to the Baku-Tbilisi-Ceyhan (BTC) pipeline as a backup route, the 1,768-kilometer-long pipeline spanning three countries is frequently hindered by shallow waters. Kazakhstan’s oil volume via BTC is expected to clock in at 1.7 million tons in the current year, an increase of only 300,000 tons.
That said, Kazakhstan might be motivated to support Russia now more than ever. A major dispute has been ongoing between Kazakhstan and international oil companies over the Kashagan oil field development, with Kazakhstan seeking billions of dollars in compensation. The dispute centers around claims that the oil majors have not fulfilled their contractual obligations, leading to significant financial losses for the country. Kazakhstan's claims have escalated to $160 billion, encompassing lost revenue due to delayed and underperforming production. A couple of days ago, Bloomberg reported that Kashagan project shareholders won a lawsuit over a potential $4 billion environmental fine by Kazakhstan.
However, the celebrations by the oil majors might be short-lived if Astana plays hard ball and demands they start paying a price that reflects the heightened political risks involved.
By Alex Kimani for Oilprice.com