Russia’s war machine in Ukraine has been funded for two and a half years by its vast oil reserves, even in the face of rising sanctions that have cut it off from key Western customers. However, a bold move by Saudi Arabia could jeopardize that strategy.
Saudi Arabia is reportedly planning to abandon its unofficial price target of $100 per barrel for crude oil in a bid to grab market share by upping supply, according to a Financial Times report in September.
A potential increase in supply set the price of OPEC+ oil, which represents 60% of oil traded globally, tumbling in the wake of the news, suggesting that the post-COVID era of high-priced fossil fuels could be coming to an end.
The country is planning to challenge the U.S. crude industry, where oil extraction is more expensive, while implicitly confirming it is difficult to charge more than $100 a barrel for crude. A Saudi minister warned in October that prices could fall as low as $50 a barrel.
The biggest victim, however, could very well be Russia’s war machine.
“For Russia, this is the worst of both worlds,” Luke Cooper, a research fellow at the London School of Economics, wrote for the IPS journal.
“Unlike the United States, it has an oil-dependent economy, which benefits from the cartel power of OPEC+. Yet, unlike Saudi Arabia, its oil is not cheap to extract, making it poorly equipped to deal with low-price conditions.
“This drives a short-term escalatory logic for Russia’s war on Ukraine, requiring rapid battlefield successes prior to the emergence of low-price oil market conditions.”
Cooper pointed out that because Saudi Arabia's and Iran’s oil wells are closer to the surface, they are cheaper to extract. Russia, on the other hand, has to spend more on production costs to extract its deep oil wells, reducing its margins.
Russia’s flagging war machine
Russia was hit with sanctions from the West in the wake of its February 2022 invasion of Ukraine. These measures have proved more harmful to the countries leveling the sanctions than to Russia itself.
Germany, which long relied on cheap Russian fuel imports, has faced a drawn-out recession in its production sector, while its economy as a whole is expected to shrink for the second year in a row in 2024.
Meanwhile, Russia’s economy grew 3.6% in 2023 and expanded at an annualized rate of 5.4% in the first quarter of 2024. However, the country has been forced to be a price taker in available markets, including China, as a result.
Stefan Hedlund, director of research at the Centre for Russian and Eurasian Studies at Uppsala University, thinks Russia’s growth figures are a mirage clouded by Russia’s wartime spending, which has artificially inflated GDP.
“The simplest explanation is the right one: Russia’s GDP growth stems from a massive boost in spending on defense,” Hedlund wrote in Geopolitical Intelligence Services.
“Large amounts of money are being funneled to contracting Russian soldiers, many of whom will be killed in Ukraine, and to the production of military hardware, much of which will be destroyed on the battlefield. Neither of these outputs can be justified in the long term.”
Writing for Project Syndicate, economist and author Anders Åslund warned that Russia may need to conclude its war in Ukraine by the end of 2025 to prevent economic catastrophe.
Russia’s lucrative weapons exports have collapsed amid more demand from its own troops, while the country is also dealing with “hidden inflation” and constraints to its budget deficit, Åslund wrote.
There are a number of factors that will determine whether Russia’s ability to continue selling oil at the price needed to sustain its war machine, LSE’s Cooper says.
That includes the extent of the green transition, how aggressively Saudi Arabia increases its oil exports, and whether Israel and Iran can step away from the brink of all-out war in the Middle East.
“If these factors evolve in such a way as to produce an oil price collapse that is equivalent in scale to 2014–2016, the Russian regime may encounter difficulties financing its war economy,” said Cooper.
