Some taxes, such as the mineral extraction tax (MET), are based on production volumes rather than profits. But as profitability declines, and especially if the sector’s investments fall, the medium-term fiscal losses become more substantial as reduced investment ultimately erodes production volumes.

Sanctions-driven increases in shipping, insurance, and compliance costs will further compress margins, reducing the tax base. The loss of foreign assets, or their sale at distressed prices, diminishes both current profit tax liabilities and future dividend streams.

Oil and gas normally account for 25–30% of Russia’s federal budget, and Rosneft and Lukoil together produce 40–45% of national oil output (Rosneft roughly 25–30%, Lukoil 15–17%). Any reduction in company profitability therefore translates directly into lower tax payments and smaller dividends.

Implications for the Russian state: Lukoil and Rosneft are the two largest taxpayers in Russia, through several major fiscal streams as well as payments associated with state-owned infrastructure. In Rosneft’s case, with state-owned majority stake, dividends are also a source of federal revenue.

Higher operating costs and lower revenues mean that both companies will have less capital available for investment. Given the capital-intensive nature of Russia’s upstream sector, under-investment can accelerate production declines over time and structurally weaken the entire industry.

Despite this, export volumes are unlikely to fall substantially in the near term, because of the already developed sanction circumvention network and practices.
However, over the medium to long term, the sanctions can become more consequential.

A sharper adjustment is expected from India as compared to China: India’s trade with Russia is less diversified, settlement in currencies other than the dollar is more difficult, and barter-like arrangements are less feasible than they are with China.

The sanctions also increase the risk for suppliers, banks, insurers, and logistics partners, now exposed to secondary sanctions when doing business with Lukoil or Rosneft. This narrows the pool of potential counterparties and gives greater leverage to buyers, who can demand deeper discounts.

The sanctions raise the prospect of forced divestments of Lukoil’s foreign assets, at depressed valuations. Even when divestment is not required, they make it hard to receive dividends from their foreign holdings. This implies loss of income in SR and of strategic presence, esp in Europe, in LR.

After the announcement, Lukoil’s share price fell by around 9.4%, while Rosneft’s declined by approximately 7%. The two have different exposure profiles. Lukoil, more private and internationally exposed, is significantly more vulnerable than Rosneft, more domestic and politically protected.

as the first sanctions package introduced by the Trump administration, and because they were coordinated with the EU’s 19th sanctions package, giving an impression of renewed transatlantic alignment after a long period of fragmentation and uncertainty. But economically? 👇