The rapid disappearance of the “war premium” from global oil prices, which caused Brent crude to collapse to $72.5 per barrel, is delivering a powerful blow to Russia’s financial system. Just this spring, amid escalating tensions in the Middle East, oil prices were approaching $120. At that time, the Kremlin was receiving super-profits despite international sanctions. The stabilization of tanker traffic through the Strait of Hormuz and the resumption of supplies have brought the market back to reality, which automatically deprives Russia of its main source of funding for the war against Ukraine.
For the Russian economy, the key problem is that its own oil grade, Urals, is traditionally sold at a significant discount to Brent. When global prices were at their peak, Moscow ignored the G7 price cap of $60 per barrel, selling crude at much higher prices. Now, with Brent at $72.5, the market price of Russian Urals has fallen as well and is barely holding within the $55–60 range. This neutralizes all of the Kremlin’s shadow schemes, as oil becomes cheaper than the sanctions-imposed ceiling.
Such a drop in prices poses a direct threat to Russia’s federal budget, which is critically dependent on oil and gas revenues. The Russian government had planned its finances assuming an average oil price above $60 per barrel. Current market conditions mean that the state treasury is starting to lose billions in oil revenues that were expected to fund military spending and cover the deficit. If the forecast by Macquarie Bank analysts of Brent falling to $67 in the third quarter comes true, the price of Russian Urals could drop to $50, widening the budget gap to critical levels.
The decline in energy export revenues will inevitably put strong pressure on the Russian currency. Petrodollars are the main factor stabilizing the ruble, and a reduction in their inflow will create a severe shortage of foreign currency in Russia’s domestic market. Experts predict this will trigger a new wave of ruble devaluation. The weakening of the national currency, in turn, will fuel inflation, forcing the central bank to keep interest rates at record highs, further slowing down civilian sectors of the economy.
The full impact of low oil prices on the Russian economy is expected to be felt closer to August–early September.
