Russia’s Economic Struggles before the Iran War

Just over a week ago, the Russian economy appeared to be in its worst state in recent times. The Russian economy was being deprived of much-needed energy revenues by low oil prices and sanctions, revenues that the Kremlin has used to fund its war in Ukraine. And in the last two weeks of February, Russian territorial gains actually went negative. However, the war in Iran has seemingly changed all of this. The Kremlin has enjoyed a sudden reversal of its fortunes as the Strait of Hormuz has essentially been closed and oil and gas production across the Middle East has been severely disrupted.

This has sent global energy prices surging, with oil prices soaring over $100 a barrel for the first time since 2022. Meanwhile, astonishingly, the US has suggested it may lift sanctions on Russian oil to cushion the blow of the war on the global oil market. Whilst the Kremlin, which has openly said it supports Iran and has reportedly even helped Iran target US troops, has thus far received basically no criticism from the Trump administration.

After the war in Iran began last weekend and amid Iranian attacks on oil tankers, shipping in the Strait of Hormuz effectively ground to a halt. Soon after this, following Iranian drone and missile strikes on energy facilities across the region, Saudi Aramco suspended operations at its largest oil refinery, and Qatar suspended gas production. As one might expect, energy costs across the globe skyrocketed. Brent crude futures, the international benchmark for global oil prices, climbed nearly 10% to a 13-month high of just over $80 a barrel.

After this jump, oil prices continued their upward trajectory when Trump said the war in Iran could last longer than the initially projected four to five weeks. Then over the weekend, with strikes across the region intensifying and other oil exporters like Kuwait announcing they’ll cut production further, oil prices went over $100 per barrel for the first time since 2022, when Russia launched its invasion of Ukraine, and at one point reached an eye-watering $119 a barrel.

The Iran War and the Global Energy Shock

Now, economically speaking, this is great news for Russia and couldn’t come at a better time for the Kremlin. For context, Russia’s war effort has been in serious trouble lately. In the last year, Russia has been struggling to reap in profits from its energy industry, its main source of foreign currency, which is in turn used to finance its war in Ukraine. This is largely because energy prices were trending downwards for most of the past year or so. Still, it is also a consequence of a strong ruble, which skyrocketed by 45% against the US dollar last year, meaning that Moscow is getting less in its own currency for each dollar it earns from its exports.

Recent US-imposed sanctions on Russia’s top producer, Lukoil Oil, last October have also led to a higher discount on Russian oil exports, pushing down the Kremlin’s revenues further. This has left its domestic oil companies struggling, with the smaller and mid-sized companies even facing bankruptcy, and put a strain on the state budget, with the deficit widening sharply last year.

However, this new oil price spike will give Russia the fiscal boost it so desperately needs. Not only are high prices good news in and of themselves for the Kremlin as the Strait of Hormuz faces major disruption, but also big oil importers such as China and India will presumably look to Russia to provide even more crude supplies. This is why the discount between Russian and non-Russian oil has narrowed in the past week, and there have even been reports in recent days that at Indian ports, Russia is able to sell its oil at a premium. In other words, because Russia is more reliable than Middle East oil right now, Russia can charge higher prices than other producers.

How Russia Is Benefiting Strategically and Economically

To top it all off, the US has suggested it could loosen sanctions on Russia in an attempt to bring down global oil prices, despite the fact that loosening sanctions won’t really increase global supply. Russia is still exporting after all, and will mainly just help Russia. On Friday, for instance, in an astonishing U-turn, the US government announced it would temporarily ease sanctions to allow India to buy Russian oil, announcing a 30-day waiver. For context, last year, India was the largest buyer of seaborne Russian oil, buying around 1.7 million barrels per day of Russian crude, roughly half of Russia’s total seaborne exports. This January, however, under pressure from the US to cut purchases, Indian imports fell to about 1.1 million barrels per day.

Even though Russia sharply increased its discount, with cargos apparently priced as low as $25 per barrel, it was expected to continue declining throughout the year as it boosted imports from elsewhere, including the Middle East. However, after the war began, Indian refineries and oil ministry officials sought to restart Russian oil shipments, and the US apparently acquiesced.

The White House has since signaled it could go further, apparently concerned about the threat to global oil supply as oil demand surges across the world. US Treasury Secretary Scott Bessant even went further by saying that the US could lift sanctions from other Russian oil companies. It’s not just a windfall of oil profits that the Kremlin is set to benefit from. Following Iranian attacks on Qatar’s huge state-owned gas company, Qatar Energy, which also accounts for nearly 20% of the global LNG trade, the gas giant halted production of liquid natural gas. This sent European gas prices skyrocketing. The benchmark gas prices traded on the Dutch TTF hub rose by nearly 40% last Monday and nearly 50% the following day.

Some estimates suggest that if the Strait of Hormuz remains closed for a month, European gas prices could rise to 130%. Similar to what we saw during the 2022 energy crisis. With Qatari supplies down, a number of European politicians, including Norway’s energy minister, have even suggested the EU might have to rethink its upcoming blanket ban on Russian gas, especially if the war in Iran continues.

Emboldened by this change of events, Putin has turned the tables and is now threatening to cut off Russian gas to Europe and redirect supplies to other new markets. All in all, with the West’s strategic focus diverted and the Kremlin set to gain a windfall revenue from oil and gas profits, Putin’s strategy of indefinitely prolonging peace talks without making concessions will likely continue. And it looks like Trump has essentially bailed him out of a genuinely tough spot.

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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.

Muhammad Haseeb Sulehria is a student of Defense and Strategic Studies at Quaid-i-Azam University, and a former internee at Pakistan’s Ministry of Defense. With a keen interest in national and international affairs, he actively explores issues of security, strategy, and global politics, aspiring to contribute to policymaking and peacebuilding.

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