–Analysis–
KYIV — According to the latest reports from reputable Western media, one of the largest players in the oil market, Saudi Arabia, has decided to lift restrictions on the production of oil. On Oct. 2, the minister of energy of Saudi Arabia said that oil prices could fall to $50 per barrel. Currently, oil is sold at $70-75 per barrel.
The Kingdom is ready for a relatively long period of lower prices, with OPEC also expected to decide on increasing oil production at its next meeting.
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The Saudis are allegedly ready to reduce the price not because of noble motives or to reduce Russia’s revenues from energy sales. They care primarily about themselves and their market share. The fact is that the OPEC+ countries do not comply with the agreements on oil production restrictions. Lower prices under such conditions could help Riyadh capture a larger share of the oil market, whose players are violating their obligations.
It is currently unclear whether Riyadh will be able to carry out its threats. Moreover, geopolitical instability in the Middle East has already caused oil prices to rise. But there is another state that could really suffer from a significant price reduction. This is Russia.
Oil diplomacy
Ukraine’s partners consider lowering oil prices an effective way to put indirect pressure on the Kremlin, for which oil and gas revenues still make up a significant portion of federal budget revenues.
In December 2022, the EU agreed on a maximum price ceiling for Russian oil at . At the time, this decision was met with great enthusiasm in Ukraine. But in vain: over time, it turned out that this restriction does not work very well. The Kremlin found ways around it. It also significantly increased energy imports to China and India. When world oil prices rose to -90 per barrel, it was no longer possible to keep Russian oil at . And petrodollars began to flow generously into the Moscow treasury.
In the first half of 2024, Russia’s revenues from oil and gas sales increased by 41% to billion in annual terms. During this time, the average price of Russian Urals oil averaged , i.e. it was significantly higher than the established limit of per barrel.
A complete embargo on energy supplies from Russia could save the situation, but in practice such a step is impossible, given the position of China, India, Turkey, and many other countries. Only a global market drop in oil prices could create significant budgetary problems for Russia.
In September, U.S. presidential candidate Donald Trump said that Russia would not be able to fight at low oil prices. He said that when oil costs 0, Putin can fight, and when it costs , the war will end. Trump also said he could cut oil prices in half within 12 months of taking office.
There is a certain logic in the statements of the Republican presidential candidate. The only question is: do the United States have enough leverage on global energy markets? And, most importantly, is it possible to keep oil prices low for a long time? Only under such conditions can Moscow face unpleasant consequences.
Russia’s leverage
When some politicians argue that it was high oil and gas prices that helped Russia arm itself and pushed Moscow to aggression, they are right. But only to a certain extent. Yes, falling energy prices may be an unpleasant surprise for Moscow. But we should not exaggerate its effect. And it is even more unrealistic to expect that as soon as the price of oil on world markets reaches , , or even , Putin will immediately stop the war and rush to negotiate.
Back in 2014, the share of oil and gas revenues in Russia’s budget was 51.9%. But this figure has been gradually falling ever since. Now it is significantly lower than it was 10 years ago — about 31%. We should not think that the Kremlin does not understand the risks of excessive dependence of the federal budget on oil and gas sales.They are trying to reduce the share of petrodollars in the treasury revenues. And, to some extent, they are succeeding.
The total budget revenues of Russia in 2024 are projected at more than 36.1 trillion rubles (5 billion), of which more than 11 trillion are oil and gas revenues. A drop in oil prices to around -50 per barrel could significantly reduce Russia’s revenues. For example, if the average price of oil during the year was , the Russian budget would lose almost 1.8 trillion rubles. At , the aggressor’s treasury would lose 3.6 trillion rubles. And per barrel would empty the Russian budget by 5.5 trillion rubles per year.
At the same time, the Russian government has budgeted 10.8 trillion rubles (0 billion) in military spending for 2024. These are record figures since the Soviet era. And they are almost identical to the total amount of revenue that Moscow will receive from the sale of oil and gas. If energy prices fell by 50%, Russia would definitely have to cut its military budget. Or, for a certain period, try to cover its deficit from other sources.
No financial collapse in sight
Russia has financial savings that will for some time reduce the effect of price fluctuations in global energy markets. For example, Russia’s National Welfare Fund was estimated at 12.16 trillion rubles (4 billion) as of Sept. 1. The reduction in revenues from the oil and gas sector can be compensated from this source for a certain period of time.
Unfortunately, this period is not just a few months. Putin will continue to finance the war and the military-industrial complex for a relatively long time before his resources are exhausted and collapse ensues.
The dependence of the Russian budget on petrodollars still exists. And it is significant. But the effect of falling prices will still be spread over time and will not be so painful as to force Moscow to end the war immediately.
Only a long-term decline in energy prices can deal a serious blow and reduce Moscow’s military spending. But there are doubts that this is possible in the foreseeable future.
