Putin’s prize: The oil price-spike

The spike in oil prices has been music to Vladimir Putin’s ears.

Until the latest version of the American-Israeli war with Iran began on Feb. 28, Russia’s war-oriented economy was in serious trouble. After initially surging as a result of the invasion of Ukraine, the economy has stalled, with the IMF forecasting in January that the Russian economy would grow only 0.6 percent in 2025 and 0.8 per cent in 2026.

Falling oil prices led to a slowdown in defense spending. When the Kremlin launched its war with Ukraine, fossil fuels accounted for 40 percent of the Russian budget. But then two things happened. By 2024, defense spending had doubled to 7.2 per cent of gross domestic product. Also, the price of Urals crude oil dropped from $90 a barrel in 2022 to less than $40 a barrel in December 2025.

Given those two new realities, oil and gas revenues dropped to less than 23 per cent of the Russian budget, compared to about 40 per cent in 2022. Unsurprisingly, defense spending, which had risen from 24 percent to more than 40 percent between 2021 and 2025, grew by only 0.1 per cent between 2024 and 2025.

When the U.S. launched Operation Epic Fury, the price of Urals oil had stabilized at about $65 per barrel since August. That rise provided some relief for Putin’s war machine.  But the decline in tanker traffic through the Strait of  Hormuz resulting from the war, has sent the price Urals oil above $100 a barrel, up 78 percent increase over the previous month.

The hefty increase in the price of Urals oil will continue to ease the pressure on the Russian defense budget.

Moreover, President Trump decided to grant India a 30-day waiver to purchase Russian oil. This might have a positive effect on Russia’s economy if Trump further extends the waiver.

The International Energy Agency’s 32 members have agreed to release 400 million barrels of oil to combat the upward pressure on prices. Nevertheless, that amount only comes to two weeks of what would normally pass through the strait, and only one-third of all International Energy Agency members’ stocks. In the meantime, Iran has begun to hit oil facilities in the Gulf Arab states. A spokesman for the regime has announced that Iran “will not allow even one liter of oil to pass through the Strait of Hormuz for the benefit of the U.S. and its allies.”

It appears that the Iranians are contemplating mining the Strait of Hormuz; Central Command reported this week that U.S. forces had destroyed sixteen Iranian minelayers near the strait. In another indication that Tehran is prepared to close the strait, Iran is shipping oil from its Jask oil terminal on the Gulf of Oman, which is located outside the Strait. The terminal, which was officially inaugurated in 2021 to transport crude oil from the Goreh-Jask pipeline, was non-operational for several years, but it is now in use.

As long as Iran continues to fire at key oil and gas facilities across the strait, especially in Saudi Arabia, Kuwait, and Qatar, as well as at shipping in the strait, oil prices will remain high, even with the International Energy Agency’s emergency increase. Any damaged infrastructure will take months, perhaps years to repair. Putin will continue to reap the benefit of high prices.

Moreover, the benefit to Russia will also mean added pressure on Ukraine. Kyiv desperately needs additional munitions, but it will find them harder to obtain as the U.S. expends them in the war at a massive rate. Indeed, in the war’s first hundred hours, America expended an unbudgeted $5.6 billion on munitions. Depending on how long the war continues, the cost could easily double or even triple.

And whatever the cost, it will take time to replace these munitions, as the American industrial base is only beginning to gear up for a higher rate of munitions production.

Trump has asked Israel to halt its strikes against Iranian energy infrastructure, hoping that Iran will cease attacking energy infrastructure in the Gulf Arab states. He has also stated that he wishes to keep the Strait of Hormuz open. How he can realize that wish is far from clear. U.S. forces have minimal mine countermeasures capacity, should Iran successfully mine the strait.

Perhaps Trump can convince NATO allies to contribute their own significant de-mining capabilities. Should they do so, in combination with ongoing U.S. attacks attacks against Iranian minelayers, Tehran will quickly discover that mining the strait is no easy matter.

Dov S. Zakheim is a senior adviser at the Center for Strategic and International Studies and vice chairman of the board for the Foreign Policy Research Institute. He was undersecretary of Defense (comptroller) and chief financial officer for the Department of Defense from 2001 to 2004 and a deputy undersecretary of Defense from 1985 to 1987.

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