Russia’s oil revenues collapsed before the Iran price jump – Now the sanctions should be tightened, says the economist

Russia benefits in its large oil and gas exports from the fact that the US and Israel’s attack on Iran has led to a significant increase in crude oil and other energy prices.

“The rise in energy prices comes at a very favorable time for Russia. The state economy there has become difficult, and in that sense these revenues will be needed and will facilitate Russia’s chances of continuing the war in Ukraine,” says a senior economist at the Bank of Finland who follows the Russian economy Heli Simola.

Oil and gas exports have been budgeted for about a quarter of all budget revenues at the Russian Federation level this year. Simola says that the key issue now for Russia’s benefit is how long energy prices will remain so high and what is the actual price difference on the market between North Sea Brent crude oil and Russian Urals oil. Recently, the price difference has swelled up to 20–25 dollars per barrel, i.e. quite large.

“Russia’s budget for this year is based on the Urals oil price of $59 per barrel. If the prices stay at $60 on average this year, Russia’s budget plan for this year would come true, or at least could come true. On the other hand, the budget is in any case drawn up as a deficit, so in that sense, its realization will not greatly ease the situation of Russia’s state finances,” says Simola.

“Another thing is that the Russian budget is a bit optimistic anyway. For example, it foresees that spending on the war could be reduced. If the war in Ukraine continues, it is difficult to see how they could be cut.”

On Friday, the market price of Russian Urals oil had already risen to around 72 dollars per barrel, while even before the Iran war the price hovered around 55 dollars. The price of Brent crude oil in the North Sea has fallen from last Friday’s high of 72 dollars to more than 90 dollars.

Russia’s income from oil and gas exports fell by 50 percent in January of this year and by 44 percent in February from the previous year, which Russia says was partly compensated by other sources of income. At the same time, income remained the lowest in ten years.

In the background, the drop in oil prices has previously been seen, which, together with Western sanctions, has caused damage to the Russian state economy. Last year, Russia recorded the largest economic deficit during its war of aggression in Ukraine.

US permission benefits India and Russia

The United States allowed on Thursday For 30 days, India will buy Russian oil from the sea, while a large number of tankers are still stuck on both sides of the Strait of Hormuz, which acts as a bottleneck for oil traffic in the Middle East.

According to Simola, it is difficult to assess the significance of the decision for Russia, but it will probably bring relief to the situation of both Russia and India.

“India will certainly take advantage of the situation now that it is more difficult to get oil from the Middle East, where the country has been buying oil from.”

Significant amounts of Russian oil have recently drifted in the world’s seas, which has been accelerated by the fact that India agreed with the United States in February to give up buying Russian oil. As a result, the President Donald Trump agreed to waive threatened punitive import duties on Indian exports to the United States.

Simola states that the war in Iran, however, is clearly not only a good thing for Russia. Russia is an ally of Iran, which Iran has supported, for example, by selling drones for use in the war in Ukraine. Now Russia has looked like a weak ally, even though it is According to the Washington Post supported Iran with its intelligence.

Sanctions should be tightened

Simola says that the sanctions against Russia should now be adhered to.

“From the point of view of the war in Ukraine, it would be very important to now be able to stick to the existing sanctions and preferably tighten them as much as possible. This is because the economic situation in Russia is already starting to be such that we now have to think very carefully about how much money is left available for the war.”

In Russia, economic growth has slowed down and economic prospects have weakened, as money has been diverted from other destinations to Russia’s military operations in Ukraine.

Regarding possible additional measures, Simola mentions the bans proposed in the EU on the transportation of Russian oil and the tighter reining of the Russian shadow fleet than is currently the case.

On the gas side, the EU is about to completely ban the import of Russian liquefied natural gas, or LNG, by the beginning of next year. President of Russia Vladimir Putin hinted this week that Russia itself might end LNG trade to Europe immediately and move to other markets. In Europe, the market price of natural gas has risen by several tens of percent since last week.

Simola says that if Russia closed the LNG trade to Europe on its own initiative, the country would at the same time cut off a branch from its own source of income.