Roula Khalaf, the Editor of the Financial Times, shares her selected top stories in a weekly newsletter titled “The Editor’s Digest.”
A recent decline in oil prices, exacerbated by trade tensions initiated by Donald Trump, has begun to impact Vladimir Putin’s financial reserves. Approximately one-third of Moscow’s budget is sourced from oil and gas revenues, and it is projected that the budget could be 2.5% lower than anticipated in 2025 if oil prices remain unchanged. This situation could compel the Kremlin to increase borrowing, reduce non-military expenditures, or deplete its remaining reserves.
The price of Urals crude, which is Russia’s primary export grade, has dropped to its lowest point in nearly two years following Trump’s tariff announcements and an unexpected decision by the OPEC+ coalition to enhance output. Urals was priced around $50 per barrel on Thursday, according to price monitoring agency Argus, whereas Russia had budgeted with an expectation of $69.70 per barrel for 2025.
The decline in oil prices is mounting pressure on the Russian economy, which is anticipated to slow down after being propelled by spending related to war. Moscow has already utilized segments of its sovereign wealth fund to stabilize the economy following the repercussions of Putin’s extensive military intervention in Ukraine, with the accessible part of these funds diminishing.
Russian officials have expressed concerns regarding the current oil price situation, with Kremlin spokesman Dmitry Peskov stating the significance of oil prices concerning budget revenues, noting an environment that is extremely volatile and emotionally charged.
This scenario demonstrates how Trump’s tariff policies have inadvertently affected the Russian economy despite efforts to improve economic relations with Moscow and attempts to negotiate an end to the conflict in Ukraine. Even after a 90-day pause in the tariff program was announced, oil prices have continued to decline.
Elvira Nabiullina, Russia’s central bank chief, warned that ongoing trade conflicts could result in a global economic downturn and potentially lower demand for Russian energy exports. If prices remain at their current rate, Russia could face a deficit of approximately a trillion roubles this year, equating to 2.5% of its anticipated budget revenues. This could translate to a 0.5 percentage point drop in GDP growth, according to Sofya Donets, chief economist at T-Investments.
Nevertheless, it may take months before the effects of reduced oil prices fully impact budget revenues, as suggested by Janis Kluge, a Russia expert at the German Institute for International and Security Affairs. The Russian economy is operating at its maximum capacity, with growth driven largely by war-related expenditures. Forecasts indicate an expansion of 1-2.5% in 2025, a decrease from the roughly 4% growth over the past two years, diminishing the likelihood of offsetting declining oil revenues with non-energy funds.
As the conflict in Ukraine continues into a fourth year, the Russian government’s capacity to offer economic support is diminishing. Since 2020, the liquid portion of Russia’s sovereign wealth fund, known as the national welfare fund, has decreased by two-thirds, and using it to cover a widening budget deficit could deplete it by the year’s end, according to Benjamin Hilgenstock, head of macroeconomic research at the Kyiv School of Economics Institute. He noted the potential necessity for painful cuts to non-war expenditures.
About $340 billion of the central bank’s reserves remain frozen due to western sanctions, significantly restricting financial maneuverability. With the dwindling welfare fund, Moscow might need to reduce spending, marking a shift from previous wartime increases, with reductions likely affecting non-military budget areas such as social spending.
If oil prices maintain a low level, Russia may need to increase taxes on exporting companies to counterbalance some revenue losses. Oleg Kuzmin, chief economist at Renaissance Capital, suggested that after considering taxation adjustments and debt financing, spending cuts might become necessary but not as immediate alternatives.
Moscow might consider raising additional debt in international markets, as its public debt level is currently under 30% of GDP, which is comparatively low internationally. However, Russian bonds remain unattractive to many foreign investors. Domestically, banks are focused on private sector lending and have shown little interest in financing deficits. Hilgenstock anticipates significant challenges for the Russian economy but does not foresee an abrupt collapse. The situation poses substantial challenges for the budget but is not deemed catastrophic.
