Falling oil prices: will it bring Russia to the negotiating table?

The recent imposition of broad trade tariffs by US President Donald Trump has triggered significant shifts in the global economy, one of which is to cause a sharp decline in oil prices. This development poses substantial challenges for Russia, whose economy heavily depends on hydrocarbon revenues, especially in the context of financing its military operations in Ukraine.

Impact of Trade Tariffs on Global Oil Prices

President Trump’s expansive trade tariffs have heightened fears of a global economic slowdown or recession. Such fears typically lead to decreased demand for commodities, including oil, as economic activity contracts. Consequently oil prices have experienced a notable decline. For instance, Brent crude prices recently fell to their lowest levels since August 2021, marking a near 20% decline amid escalating trade tensions. 

Russia’s Economic Dependence on Oil Revenues

Russia’s economy is significantly reliant on oil and gas exports, which have historically accounted for a substantial portion of its federal budget revenues. In 2024, proceeds from oil and gas sales for Russia’s federal budget amounted to approximately 11.13 trillion rubles (US$108.22 billion), reflecting a 26% increase from the previous year. This revenue constituted a significant share of the federal budget, underscoring the critical role of hydrocarbon exports in Russia’s fiscal health.

Cost of Oil Production and Budgetary Breakeven

The cost of extracting and selling oil varies, but Russia’s budgetary planning is sensitive to global oil prices. Reports indicate that Russia’s budget oil breakeven price is among the world’s lowest, allowing some resilience against price fluctuations. However sustained low prices can still strain fiscal resources, especially when revenues are earmarked for significant expenditures like military operations.

Financing the War in Ukraine

Engaging in military operations, such as the conflict in Ukraine, imposes substantial financial burdens. Estimates suggest that the daily cost of the war ranges from US$500 million to US$1 billion. This translates to annual expenditures potentially exceeding US$180 billion, necessitating robust and consistent funding sources. Considering that Russia's total estimated annual revenues from hydrocarbon revenues are US$108.22 billion, the war is exceedingly expensive for Russia and more than wipes out the entirety of her hydrocarbon revenues. A substantial decrease in global hydrocarbon prices is therefore likely to impact heavily upon the Russian economy, requiring tax increases and withdrawals of federal funding from other areas in order to continue financing the war in Ukraine. This in turn will affect the quality of living of Russian citizens, potentially leading to popular discontent.

The weight of popular discontent in the Russian political system is less than in most countries, given the Russian government's totalitarian nature. Nevertheless it is not zero; and in particular Russia's upper and middle classes, some of whom harbour particular influence in the highest Russian political circles, may start fomenting revolutionary ideas to get rid of their long-serving dictatorial leader and replace him with someone more conciliatory towards the West. Prior economic crises in post-independence Russia, in particular the 1998 Russian banking crisis, had a similar effect.

Impact of Sanctions and Discounted Oil Sales

International sanctions have compelled Russia to adopt alternative strategies for oil exports, including the use of a “shadow fleet” of ageing Soviet-era oil vessels with changing "flags of convenience", forged certificates of origin and fake Bills of Lading, to evade restrictions. This approach often involves selling oil at discounted prices to major importers like China and India, who, aware of Russia’s constrained market access, negotiate lower prices. Such discounts further diminish Russia’s revenue per barrel, exacerbating the fiscal impact of falling global oil prices.

Sustainability of War Financing Amidst Declining Oil Prices

With Urals crude prices recently dropping to approximately US$52.76 per barrel—significantly below the US$70 per barrel benchmark used for Russia’s 2025 budget planning—the sustainability of financing prolonged military engagements comes into question. If oil prices remain depressed, Russia may face increasing fiscal deficits, potentially forcing reallocations from other budgetary areas or necessitating foreign currency borrowing, both of which could have long-term economic repercussions, including hyperinflation should Russia's ruble continue to slide against the US dollar as appears to have been a habit in recent days.

Potential for Further Declines in Oil Prices

The continuation of trade tensions and the imposition of tariffs may lead to further declines in global oil prices. As the market anticipates reduced economic activity, demand for oil may decrease, exerting additional downward pressure on prices. This scenario would intensify the financial challenges faced by oil-dependent economies like Russia.

Implications for US Energy Policy and Geopolitical Strategy

The current situation aligns with the US administration’s “energy dominance” policy, which aims to leverage America’s energy production capabilities to influence global markets and achieve geopolitical objectives. By affecting oil prices through trade policies, the US can exert economic pressure on adversaries reliant on hydrocarbon revenues.

Shifts in Russian Media Sentiment

Russian state-controlled media, which earlier in the Trump administration's tenure viewed President Trump’s foreign policies favourably, have exhibited a shift in tone amidst the economic strains induced by the tariffs and declining oil prices. This change reflects growing concerns within Russia about the adverse impacts of US trade policies on her economy. 

Conclusion

The recent drop in global oil prices, spurred by US trade tariffs and associated recession fears, poses significant challenges for the Russian economy, particularly in financing her military operations in Ukraine. Sustained low oil prices, coupled with the necessity to offer discounts due to sanctions, may compel Russia to reassess her fiscal strategies and could potentially influence her geopolitical decisions, including her stance on the conflict in Ukraine.