The Russia Oil Surcharge: Anticipating the Benefits and Challenges

Commentary by Clayton Seigle

Published August 26, 2025

This Commentary builds on the previously proposed surcharge mechanism designed to drive Russian oil revenues lower. In short, the U.S. government would impose a fee on Russia's oil customers, like India, in exchange for waiving strong new secondary tariffs.

This approach is designed to isolate Moscow's revenues in isolation: without trying to sink global oil prices (bad for U.S. industry economics) and without removing large Russian volumes from the market that would risk a price spike (bad for the fight against inflation).

This analysis addresses three key considerations arising from our proposal to maximize U.S. leverage to end the war in Ukraine.

Consideration 1: Eroding Russia's Spending Power to Pressure Putin

With 7.3 million barrels per day (mb/d) of oil exports and prices around $64 per barrel, Russia earned about $467 million per day, or $14 billion from its oil sales during the month of July. How much of a revenue reduction is needed to change behaviors in Moscow?

A new shortfall of $40-50 billion will apply significant stress to Russia's remaining financial sources and erode its current account surplus. An initial $20 per barrel surcharge that effectively caps Russian revenues around $45 could achieve this target. Here's how:

Russia faces a mushrooming budget deficit-during the first seven months of 2025, it had already reached $61.1 billion, exceeding the full-year budget by a quarter, as wartime spending continues apace and oil revenues have come in below expectations. Western policymakers should target a further revenue cut of about $50 billion to further widen the deficit and apply stress to Moscow's financial coping mechanisms.

Russia's budget has two important lifelines to supplement oil and gas revenues: the National Welfare Fund (NWF) and debt issuance. Faced with low oil revenues, Moscow has resorted to both sources to preserve adequate war funding. The more Washington and its allies can reduce Russia's oil revenues, the more Moscow will be forced to drain the NWF and increase indebtedness to perpetuate military spending-and these lifelines are not without limits.

After drawing heavily from the NWF to finance the budget during the first part of the year, Russia's Ministry of Finance managed to reinforce it in May by purchasing yuan and gold and transferring those assets into the fund. However, even the NWF's bolstered liquid assets of ₽4.1 trillion (about $51 billion) are only 9 percent larger than the target deficit of $47.2 billion-a very small margin.

Every dollar of oil revenue reduction shrinks Russia's fiscal cushion, increases reliance on debt issuance, and ratchets up the political pressure on Moscow.

As the NWF is drained, more debt issuance by the Central Bank of Russia is required to maintain adequate liquidity. But domestic banks are the only remaining buyers of the government's OFZ federal loan bonds (similar to U.S. Treasury bonds); their assumption that Moscow can successfully navigate the war and the economy is likely a major catalyst for OFZ demand. If domestic banks see no light at the end of the tunnel, and if inflation concerns are stoked by potential new interest rate cuts by the Central Bank of Russia, then demand for government bonds (at least at the long end of the yield curve) may dry up, leaving less money available to augment federal funding.

The second vector for squeezing Moscow's finances is the current account, the total value of a nation's trade and investment. A major current account deficit, one greater than 2 percent of GDP, is often associated with an economic crisis. As recently as 2022, before sanctions and reduced energy revenues took their toll, Russia ran a current account surplus of $230 billion. In 2023-2024, the surplus was slashed to $50-60 billion, and Russia is projected to run a similarly small ($52 billion) current account surplus this year.

Flipping that surplus into a deficit might not precipitate a full-blown balance-of-payments crisis and drive the ruble into free fall, but it would likely dial up the pressure on Putin as increasingly more resources would be needed to offset the losses, further deteriorating Moscow's fiscal posture.

A monthly revenue reduction of $4.3 billion would eliminate the $52 billion current account surplus within 12 months. A reduced oil export price of $44 per barrel, about $20 less than Russian oil sells for today, would theoretically achieve this result. We therefore propose a $20 per barrel initial surcharge to be imposed on Russia's oil customers in return for waiving secondary tariffs.

While China and Turkey may defy the surcharge requirement, thus requiring more than 12 months to wipe out the current account surplus, the surcharge is still worth doing to squeeze Russia's oil revenues as much as possible with compliant U.S. trade partners. In the best-case scenario, China and Turkey would also be subject to the surcharge, but even with those two excluded, the surcharge would apply to more than 60 percent of Russia's oil exports and have a material effect on Russia's financial posture.

Consideration 2: Anticipating Russia's Countermoves

As one of the world's top oil producers, Russia holds a powerful card in its ability to "weaponize" oil exports by withholding them from the market. The play here would be to cut global oil supplies enough to increase all oil prices, including Russia's, thus somewhat offsetting Moscow's revenue hit from selling fewer barrels.

The proposed surcharge that floats with international prices takes the wind out of the sails on this front, neutralizing Russia's ability to profit from an export curtailment, assuming Russia's customers comply. While international prices may move higher as Russian barrels exit the market, the surcharge would float higher in turn. For example, if the surcharge is initially set at $20 per barrel while Brent trades at $65, then a $10 surge in Brent to $75 would increase the surcharge from $20 to $30, forcing wider discounts and thus keeping Russia's oil sale prices unchanged.

Even if Moscow doesn't benefit financially from higher prices caused by export curtailment, this threat to inflict pain on its adversaries' economies still constitutes important leverage. The United States and other Western economies are working to maintain success in the fight against inflation; runaway fuel prices could undermine that progress. For his part, President Trump has expressed sensitivity toward gasoline prices and emphasized his administration's role in keeping them relatively low so far this year.

There's no mathematical formula to predict how much oil prices will increase in response to a certain supply curtailment. In spring 2022, following Russia's invasion of Ukraine, crude prices spiked to more than $120 per barrel (from a starting point around $80 per barrel) on fears that the world could lose up to 5 mb/d of Russian crude output. However, spare capacity within the Organization of the Petroleum Exporting Countries (OPEC) is higher now (4 mb/d) than it was then (2.6 mb/d), and non-OPEC producers are ramping up supply even as oil demand in the world's advanced economies has slowed. The U.S. Energy Information Administration expects global oil supply will exceed demand by about 1.5 mb/d in 2025-2026. A loss of Russian barrels at this time, therefore, might not trigger as large a price spike as seen in 2022.

Even if Russia were to halt all 4.5 mb/d of oil exports that don't go to China and Turkey in an effort to lift its sale prices, it's unlikely that the resultant oil price spike would offset the sharp export volume reduction-meaning Moscow would be worse off financially for having slashed exports.

Moreover, some observers, like Harvard University's Craig Kennedy, believe Putin is unlikely to play this card for any extended period, anticipating that it would backfire as Moscow loses oil market share to competitors incentivized to ramp up output.

Disruption of Kazakh Oil Could Provide Moscow a "Free" Price Uplift

What if Russia could increase oil prices by removing someone else's exports from the market instead of its own? Then it would reap the benefits of inflicting higher world oil prices on its adversaries while maintaining its own sales volumes. Unfortunately for Kazakhstan, this scenario is a perennial vulnerability. Its crude oil from the Caspian Production Consortium (CPC), exported from Russia's Black Sea port of Novorossiysk at a rate of 1.4 mb/d, is always at risk of being throttled or cut off by Moscow. Smaller volumes of Kazakh oil are exported from Russia's Baltic Sea port of Ust-Luga, which came under Ukrainian fire in recent days.

Recent short-lived disruptions to CPC oil flows, although attributed by Moscow to infrastructure maintenance and safety regulations, highlighted the risk that Russia could shut off the CPC oil flows at any time.

All else equal, and in the context of OPEC spare capacity at 4 mb/d, a shutoff of 1.4 mb/d of CPC crude exports attributed to Russian geopolitical "bullying" could be worth approximately $8 in global crude oil price escalation. This might translate to ¢20 per gallon of gasoline-hardly a major source of economic pressure on Washington and allied capitals.

Consideration 3: Optimizing the Strategic Outcome

The Trump administration's willingness to pressure India with secondary tariffs, scheduled to take effect on August 27, is an important step in the right direction. However, making Russian oil imports unaffordable for India-at the cost of trade relations with the United States-will harm U.S. interests with a combination of reduced global oil supplies and providing a sweetheart deal on distressed Russian barrels for China.

Here's where the surcharge can enable U.S. success on multiple levels. If India had paid the United States $20 for each of the 1.4 million barrels per day of Russian oil it imported in July, the surcharge would likely have pressured Russian prices in that trade lower by around $20 per barrel, cutting Moscow's revenues from oil sold to India last month by around $840 million (31 percent).

Applying the surcharge going forward, India would not need to choose between importing Russian oil and maintaining healthy trade with the United States-it could have both. With continuing demand from India, distressed Russian oil will not be offered to China at lower prices-a trend that was already starting to emerge this month after the secondary tariffs (without a surcharge "off ramp") were announced.

Meanwhile, Washington would have received a new cash inflow of $840 million-just from July-to spend on promoting U.S. interests in Ukraine, effectively seizing nearly one-third of Russian revenue from oil sold to India.

This math assumes that going forward, Russia's customers force wider discounts, equal to the value of the surcharge, and that China is not let off the hook with preferential treatment.

For best results, Washington should hit all Russian oil buyers with the same or similar secondary tariffs that have been announced for India, accompanied by a waiver in consideration of the proposed surcharge. This approach will drive Russian revenues lower and free up considerable funding for Washington's national and economic security priorities, while keeping volumes on the market with a manageable risk of disruption.

Clayton Seigle is a senior fellow in the Energy Security and Climate Change Program and holds the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies in Washington, D.C.

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