High oil prices give Russia a “lifeline” that may not last long

Russian President Vladimir Putin entered the new year facing a difficult choice: either limit his so-called special military operation in Ukraine, or risk causing serious damage to his country’s economy.

Overnight, US President Donald Trump presented him with a solution. The US and Israeli strikes on Iran led to a rise in oil prices, which strengthened the Kremlin’s main source of revenue and made it easier for Moscow to continue its war efforts.

After Israel bombed Iranian oil facilities, record crude oil prices rose to more than $100 per barrel, recording their highest level since the summer of 2022, when prices rose sharply following Russia’s war on Ukraine.

For Russia, the rise in oil prices represents an economic windfall at a crucial moment, as the cost of four years of war in Ukraine threatens to cause a domestic economic crisis. An attack on Iran may undermine Moscow’s claim to stand with its allies, but it actually benefits the Russian economy and thus its war against Ukraine, putting the Kremlin in a good position to be one of the main beneficiaries of the expanding conflict in the Middle East.

Economic transformation

Just a few weeks ago, the mood among Russia’s economic elite was bleak, as the Russian Finance Ministry’s budget plan for this year assumed that the price of a barrel of crude oil from the Urals, the main blend the country exports, would reach $59. But in January, energy revenues fell to their lowest level since 2020, adding to the disappointing tax volume.

As Western sanctions, rising interest rates and labor shortages compound pressures on the Russian economy, tensions between the Finance Ministry and the Central Bank over how to mitigate the damage have become more evident.

In this context, Sergei Vakulenko, a fellow at the Carnegie Russia Eurasia Center, said: “It was not close to collapse, but the government was facing difficult choices, including having to cut spending, raise taxes, and even consider some cuts in military spending.”

Vakulenko added, “Stopping the war in Ukraine was never on the table, but it has become clear that even on this level, Russia will have to tighten up a little.”

Then the United States and Israel attacked Iran, and as Tehran responded and the conflict spilled over into a regional war, shipping through the Strait of Hormuz stopped, sending oil prices soaring.

For his part, former Russian Deputy Energy Minister, Vladimir Milov, who turned into a critic of the Kremlin in exile, said: “Suddenly, Moscow received this gift… It got its lifeline,” noting that Russian officials are “very happy these days.”

Strategic error

Instead of selling at discounted prices due to Western sanctions, Russian crude oil may now fetch higher prices, as its main buyers: India and China, race to secure supplies. Moreover, they will have the approval of Washington.

Last Friday, the US Treasury Department issued a 30-day exemption allowing India to purchase Russian crude oil “to enable the oil to continue flowing to the global market.”

A day later, Treasury Secretary Scott Besent said that “the United States may lift sanctions on Russian oil,” in a sharp shift from last year’s policy that punished countries that bought Russian energy.

It is not surprising that the Kremlin is exploiting this moment to make the most of it. “Russia has been and remains a reliable supplier of oil and gas,” Russian presidential spokesman Dmitry Peskov told reporters in what appeared to be a sales pitch, adding that “the demand for Russian energy products has increased.”

Meanwhile, Kremlin advisor Kirill Dmitriev bragged in a series of posts on the X platform that “the tsunami of the oil shock has just begun,” and criticized Europe’s decision to cut ties with the Russian Energy Ministry, calling it a “strategic mistake.”

The day before yesterday, pro-Kremlin commentators published an article in the Wall Street Journal, predicting that oil prices would rise to $215.

Long game

Energy experts warn that it is too early for Moscow to declare victory. Whether the Iran war will be a cure for Russia’s economy or not depends directly on how long it continues.

Milov (former Russian Deputy Energy Minister) said that in order to make a tangible difference in the economy, Russia will need oil prices to remain at their current levels for about a year.

He added: “Certainly, higher prices for a month or two will help, but it will not save the Russian economy.”

Vakulenko (a fellow at the Carnegie Russia Eurasia Center) also stressed that the temporary rise in prices will only “postpone difficult decisions.”

There is another reason why Moscow hopes the war will continue: With every passing day of fighting, the United States is depleting the weapons stockpiles that Ukraine relies on to defend itself.

According to media reports, Russia is providing Iran with intelligence information to help it target American warships and aircraft.

The killing of Iranian Supreme Leader Ali Khamenei in a US-Israeli air strike may have dealt a blow to Russia’s promises to defend its allies, but Putin may ultimately decide that this was a price worth paying.

About “Politico”

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Declining cash flows

Oil and gas exports have supported Russia’s finances throughout its war against Ukraine, but four years into the war, these cash flows have suddenly fallen to their lowest levels in years.

This is due to new punitive measures imposed by the United States and the European Union, and customs pressures exerted by President Donald Trump on India, which imports oil from Russia, as well as tightening measures on the tanker fleet that transports Russian oil and evades sanctions.

The decline in revenues prompts President Vladimir Putin to borrow from Russian banks and raise taxes, which maintains the stability of the state’s public finances at the present time, but these measures only lead to increased pressure on the war economy, which is now suffering from slow growth and persistent inflation.

In January, Russian state revenues from taxes imposed on the oil and gas industries fell to $5.1 billion, and this is the lowest level since the Corona pandemic, according to Janis Kluge, an expert in the Russian economy at the German Institute for International Affairs.

. The rise in oil prices represents an unexpected economic gain for Russia at a crucial moment, after the cost of 4 years of war in Ukraine threatened to cause an economic crisis.

. Russian crude may fetch higher prices rather than sell at discounted prices due to Western sanctions, with its main buyers, India and China, racing to secure supplies.