The Drop in Global Oil Prices: What Will Happen to russia

The rapid disappearance of the “war premium” from global oil prices – which caused Brent crude to plummet to $72.5 per barrel – is dealing a severe blow to russia’s financial system. Back in the spring, amid escalating tensions in the Middle East, oil prices were approaching $120. At that time, the kremlin was reaping windfall profits in defiance of international sanctions. The stabilization of tanker traffic through the Strait of Hormuz and the resumption of supplies have brought the market back to reality, automatically depriving the rf of its main source of funding for the war against Ukraine.

The key problem for the russian economy is that its own Urals crude is traditionally sold at a significant discount to Brent. When global prices were at their peak, moscow ignored the $60-per-barrel “price cap” set by the G7 countries, selling its crude at a much higher price. Now that Brent has fallen to $72.5, the market value of russian Urals crude has plummeted and is barely holding within the $55–60 per barrel range. This undermines all of the kremlin’s shadow schemes, as oil is becoming cheaper than the limits set by sanctions.

This drop in prices poses a direct threat to the rf’s federal budget, which is critically dependent on oil and gas revenues. The government of the rf had based its financial plans on an average oil price of over $60 per barrel. Current market realities mean that russia’s treasury is beginning to lose billions in oil revenues that were intended to fund military needs and cover the budget deficit. If Macquarie Bank analysts’ forecast of a drop in the price of Brent to $67 in the third quarter comes true, the price of russian Urals crude will fall to $50, widening the rf’s budget deficit to critical levels.

The decline in energy export revenues will inevitably put significant pressure on the russian currency. Oil dollars are the main factor behind the ruble’s stability, and a reduction in their inflow will create an acute foreign currency shortage in russia’s domestic market. Experts predict that this will lead to a new wave of ruble devaluation. The decline in the national currency, in turn, will fuel inflation in russia, forcing the central bank to keep interest rates at record highs, which will further slow down civilian sectors of the economy.

russia’s economy will begin to feel the full impact of low oil prices closer to August or early September.