Vladimir Putin has benefited hugely from the Iran war

The ship’s U-turn is a metaphor for the dramatic reversal in the fortunes of Russia’s energy industry since its beginning. Iran war. actual completion of strait of hormuz About 15% of the world’s oil is trapped in the Gulf. In December Brent crude, the global oil-price benchmark, touched a five-year low of $59 a barrel, and the industry predicted a “superglut”; Now it’s around $100. This makes it harder to stay away from the Russian barrel. On March 12, the Trump administration extended its waiver to enable all countries to buy Russian oil pre-loaded on tankers.

For Vladimir Putin, relief could not have come at a better time. Before the Iran war, it looked as if Russia’s oil revenues and its economy were finally sinking. Many refiners in India and China, the country’s biggest customers, had halted purchases around November, before US sanctions took effect on its two biggest producers, Rosneft and Lukoil. By February, export volumes had fallen by a fifth; This means that even with low prices, the Kremlin’s oil-and-gas revenues were 44% lower than a year earlier (see Chart 1). Its budget deficit reached 3.4 trillion rubles in just two months, nine-tenths of the entire 2026 target (see Chart 2).

Now Brent is back to where it was on average in the year of Russia’s full-scale invasion of Ukraine. Robin Brooks of the think-tank Brookings Institution believes that should Hormuz remain closed longer, Russia could get another “2022-style windfall” – enough to offset the $300 billion of central bank reserves frozen by the West that year.

The most immediate benefit of the Gulf crisis for Russia is the chance to clear the huge shipment backlog that had accumulated at sea due to a lack of buyers. India has already increased its purchases by nearly half, helping reduce Russia’s water inventories by more than 10% to 122 million barrels (see Chart 3). China’s imports have also increased. This helps traders rather than Russia’s finances, as the shipments have already been sold. But it seems likely that the Trump administration, officially or not, will take an even lenient stance toward Russia’s new barrel. This would benefit Russia on three fronts: higher prices for its goods; humiliated Western sanctions; and potential Chinese support for new projects.

First take the prices. The absence of Gulf oil has created a shortage of alternative crude oil. Russia is more attractive than other countries: it is similar in quality to most Middle Eastern oil, and therefore cheaper and easier to process for Asian refiners (the Gulf’s main customers). Supply is now so tight that demand for Urals crude is now priced at a premium to Brent when supplied to India (see Chart 4).

It may even provide an idea of ​​how much profit sellers of Russian crude can expect to make today. China’s independent “teapot” refineries, which buy much of it, use “trigger pricing” to pay for imports. Suppliers can give them up to two months after delivery to set a price indexed to Brent, giving buyers time to raise cash through product sales. Refiners, meanwhile, will have to post margins based on the spot price of the cargo. Tom Reed of price-reporting agency Argus Media says Brent is now rising so fast that many tykes are struggling to meet margin calls. This gives suppliers the option to “force trigger” deals at peak prices.

Sergei Vakulenko, formerly of Russian oil company Gazprom Neft, estimates that every $10 increase in the price of Brent in a month increases Russia’s energy exports by $2.8 billion, of which some $1.6 billion goes to the Kremlin. High gas prices provide little pocket change (most of Russia’s LNG is sold by a private firm, and piped exports are well below 2022 volumes). This would help meet Russia’s budget for 2026, which had assumed oil prices at $59 a barrel to buy additional time to wage war. It will also mechanically boost GDP.

Meanwhile the energy crisis is making it harder for Western countries to tighten sanctions – another bonus for Mr Putin. Earlier, the Trump administration seemed willing to get a little tougher on Russia by imposing “secondary tariffs” and beefing up its shadow fleet. However, with the latest loosening, America’s credibility has been weakened, says Rachel Ziemba of the think-tank Center for a New American Security. It also widens differences with the European Commission, which had proposed a blanket ban on maritime services for Russian oil exports, a move intended to be coordinated with the US and other G7 members. That sanctions package also appears unlikely to pass after Hungary and Slovakia opposed it.

What’s even more worrying is that the looming gas crisis could force European countries to back out of a commitment to stop buying Russian LNG from next year. Hungary and Slovakia, which are due to stop receiving piped gas from Russia in 2027, may also withdraw. “We cannot afford to fight two wars at the same time,” says one European official.

The war in the Gulf also worries China, which typically receives a third of its LNG from the region. This could bring it even closer to Russia – the third benefit. The crisis has made China acutely aware of its vulnerability to maritime chokepoints. The country has huge reserves of crude oil – 1.3 billion barrels, equivalent to about four months of imports – but its gas reserves, which are hard to store, cover only 40 days. Drawing on those reserves now would force it to restock through the summer, when China may face tough competition against Europe, Japan and other buyers for spot LNG cargoes.

This makes overland gas-supply options attractive – and Russia offers one. In recent years the Kremlin has lobbied hard for China to support the Power of Siberia 2, a 2,600 km pipeline that could more than double Russia’s gas exports to the country. The two governments signed a memorandum of understanding last year, but talks on price, quantity commitments and take-or-pay terms have stalled as China has taken a tough stance. It is possible that China will now offer a slightly better price, improving the prospects of the project. Over time it could even buy more from Russia’s giant LNG projects in the Arctic.

luck that can’t last

Thane Gustafson of Georgetown University says the remarkable turnaround in Russia’s fortunes may yet prove to be a “sugarcoating” that does little to solve its deeper problems. Ukraine’s frequent attacks on Russian oil facilities have forced energy companies to divert what little capital they had earmarked for new drilling into repairs. Sanctions, low prices and greedy tax authorities have further reduced the industry’s ability to invest in new production. Analysts believe Russia has only 300,000 barrels per day of spare capacity, making it unlikely to replace most of the Gulf’s missing 10m-15m b/d in the near term. John Kennedy, a former British trade official in Russia, says, “There is every incentive for Ukraine to redouble its attacks to ensure that Russian production remains at risk.” It also cannot produce much LNG.

Could higher prices give Russian oil companies the ability to increase production over the long term? Perhaps, but the industry faces a dilemma. Companies make large investments only when prices are expected to remain high for a long time – meaning the Gulf War lasted well beyond March. But a prolonged crisis could push Brent above $150 a barrel, destroying demand and accelerating the shift away from petroleum, reducing the gains from higher prices. The Kremlin could in any case raid the bounty for revival, leaving little room for increased production. Meanwhile chaos in the Gulf could lead to the collapse of OPEC, turning Russia and its former allies, not least Saudi Arabia, into competitors.

So the Iran war is not a game-changer for Russia. It was in a much better position before 2022, when it could sell hydrocarbons to the entire world, its oil companies could partner with Western majors and its energy infrastructure was not crippled by strikes and sanctions. Mr. Vakulenko believes higher oil prices and a little more leverage would probably offset 20% of that loss. But, he says, they will not stop Russia’s oil production from falling by 3% per year. As money and manpower have been poured into the war machine, the civilian economy has been completely ruined. Nor will more money translate into military success on the battlefield: Russia’s lack of progress is not that it lacks financial firepower, but that it cannot project military force. Hormuz has brought Russia to Chinese level. But that can’t fix all its problems.