Soaring oil prices could bring the Kremlin billions — but they still won’t fix the Russian economy
In just a matter of weeks, the Middle East war has taken on enormous significance for Russia’s leadership. After the first two months of the year, the country’s federal budget deficit had already spiraled out of control. But the blockade of the Strait of Hormuz — through which roughly 27 percent of global seaborne oil and petroleum products trade passes — triggered a sharp spike in commodity prices. This could allow the Kremlin to hold the annual deficit to its target of 1.6 percent and keep military spending at the top of its priorities. Even so, this windfall won’t resolve the deep structural problems plaguing a war-battered economy. Meduza explains what the high price of oil means for Russia’s pocketbook.
Russia’s budget before the Iran war
In January and February 2026, Russia’s federal budget deficit reached 3.45 trillion rubles ($42 billion), or 1.5 percent of GDP — nearly the full-year target of 3.79 trillion rubles ($46 billion, about 1.6 percent of GDP) set out in the latest budget law.
With oil prices low, oil and gas revenues collapsed by 47.1 percent compared with the same period in 2025. Dmitry Kulikov, chief macroeconomist at the rating agency ACRA, had warned that the government had built its 2026 budget around an overly optimistic Urals price of $59 per barrel — a bet that threatened a revenue shortfall, a widening deficit, and a host of other problems.
Meanwhile, spending in the first two months rose by 5.8 percent year-on-year. The Finance Ministry had cautioned that spending was being front-loaded — deliberately concentrated at the start of the year rather than spread evenly across it.
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Even so, the collapse in oil and gas revenues combined with higher spending produced a staggering deficit equal to 91 percent of the full-year target. To plug the gap, the government borrowed on the domestic market and drew down the national reserves accumulated during past years of outsized oil and gas profits — the National Wealth Fund (NWF). The fund’s liquid assets had already shrunk by more than half since the war began, and at the pace the deficit was expanding (nearly 400 billion rubles, or $4.8 billion, were pulled from the NWF in January–February alone), it would not have lasted long. The only alternative to draining reserves was piling on even more domestic government debt — but at current interest rates, that is expensive to service and only pours fuel on inflation.
The depletion of reserves had already pushed officials toward considering spending cuts (though not to military spending). Then, in late February, the picture shifted: Donald Trump launched a war against Iran, and Tehran responded by blocking the Strait of Hormuz, triggering a major crisis on global oil and gas markets. By the third week of fighting, Brent crude had stabilized above $100 per barrel, with no end to the conflict in sight — Washington has reportedly not ruled out a ground operation.
How the Middle East war could ‘save’ Russia’s budget
Russia is arguably one of the main beneficiaries of the conflict. Its oil exports don’t depend on the Strait of Hormuz, unlike those of Saudi Arabia, Iraq, the UAE, and others. Prices for Russia’s Urals crude jumped from around $45 per barrel in February to roughly $75 in March, while the United States temporarily eased sanctions.
How much Russia ultimately earns from the war will depend on its duration and intensity. The Kremlin doesn’t want a full-blown global recession that would crush oil demand. What it wants is a moderately prolonged conflict that keeps prices elevated — whether due to an actual blockade of the strait or the persistent threat of one.
According to Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center, every $10 increase in the average monthly Urals price brings in roughly $1.63 billion in additional tax revenue (around 134 billion rubles) to Moscow. “A $20 increase sustained for a month means an extra $3 billion for the state. A $40 increase lasting half a year means $38 billion more,” he estimates.
If the war drags on for several more months, Russia could well meet its 2026 budget targets. “The oil and gas revenue figure in the original budget — 8.919 trillion rubles [$108 billion] — looked unrealistic given the high assumed oil price and the weak ruble. Now it seems achievable, with only a modest shortfall at most,” a leading economist at a Russian think tank told Meduza.
My read is that hostilities in the Middle East are likely to continue for a couple of months, along with the fallout from lost production capacity in the region and a closed or partially closed Strait of Hormuz. Oil prices for tax purposes have already exceeded the budget assumptions; as a result, the annual average could end up close to the baseline price of $59.
Russia’s gains aren’t limited to oil: Moscow could also reap financial and political benefits in gas markets — Qatar supplies around a third of global LNG, and its main Ras Laffan plant has been offline for weeks — and in fertilizers.
The state of Russia’s economy right now
Despite the unexpected windfall from the Middle East war, Russia’s economy continues to slow, and output in civilian sectors is falling.
The Central Bank’s latest business survey showed a marked deterioration in March: the composite business climate indicator turned negative (-0.1) for the first time since October 2022. The lower the reading, the worse companies rate conditions for production and demand. For comparison, at the peak of economic overheating in May 2024, the indicator stood at 10.5.
As one of the Central Bank’s most representative gauges of business activity, the index confirms that the economy is losing momentum, according to economist Dmitry Polevoy. At such levels, the economy has historically either been in recession or hovering near stagnation, well below its potential growth rate of 1.5–2.5 percent annually.
Last week, the Central Bank cut its key rate by just 50 basis points, to 15 percent. Inflation picked up in January after VAT was raised from 20 percent to 22 percent; it eased slightly in early February, but the risks of renewed price pressure remain elevated, limiting the regulator’s room to cut rates more aggressively. Annual inflation could reach around 5.7 percent by the end of March, according to CMACP economist Dmitry Belousov. With borrowing costs at 15 percent, credit remains expensive for businesses and households alike. Investment in fixed capital fell by 2.3 percent in real terms in 2025 — the first such decline since 2020.
How the authorities plan to cut spending
According to Reuters, the Russian Finance Ministry has asked government agencies to identify 10 percent of “unprotected” spending for potential cuts. “The ministry promised to cut everything except military spending and core social obligations. Debt servicing should be added to that protected list as well,” a source at a Russian think tank told Meduza.
Spending on national defense and security in 2026 is planned at 16.8 trillion rubles ($204 billion), social policy at 7.1 trillion ($86.3 billion), and debt servicing at 3.9 trillion ($47 billion) — a combined 27.8 trillion rubles ($338 billion) out of total planned expenditures of 44.1 trillion ($536 billion). That leaves 16.3 trillion rubles ($198 billion) for the civilian economy, healthcare, education, infrastructure, and other areas.
“The idea was to cut the remaining spending by around 10 percent. In practice, a flat cut is unlikely — there will be ‘semi-protected’ items that get trimmed only cosmetically. Overall, I wouldn’t expect total spending to fall by more than 0.4–0.5 percent of GDP,” the source said. Bloomberg puts the maximum possible sequestration this year at around 2 trillion rubles ($24 billion), or 0.8 percent of GDP.
“They’re not cutting what was expanded — they’re cutting what’s left, and there’s not much left. Reducing spending will finish off what little remains of economic growth,” an Economic Ministry official told The Bell.
Even if cuts do happen — and the oil windfall from the Middle East could make politicians reluctant to take painful decisions this year — they won’t resolve the worsening structural problems: the hollowing out of the civilian sector, labor shortages, regional budget deficits, corporate debt, and growing dependence on China, among others.
One issue that has barely surfaced in public debate but is increasingly being discussed among economists is pensions. Amid natural population decline, wartime deaths and injuries among working-age men, emigration driven by opposition to the war, rising nominal wages, and inflation, the replacement rate — the ratio of the average pension to the average wage — fell from 31 percent to 25 percent between 2018 and 2025 (down from 35–37 percent in 2012–2015). That suggests Russia may soon need to raise the retirement age again to keep pension payments sustainable.
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