Europe, Britain, and even the United States, after a fashion, have all stepped up their pressure on Russia’s energy revenues in recent weeks, aiming to bankrupt the Russian war machine.
But the biggest threat on the horizon for an already reeling Russian economy may be its former OPEC pals, who in recent months have opened the taps on a flood of new oil production, helping to drive crude prices to a five-month low.
With even cheaper oil in the cards next year, as many analysts expect, Russia’s discounted grade of oil will bring in even less money than the reduced amounts it brought in this year, putting further pressure on a Russian budget gearing up for its biggest deficit since the war in Ukraine began.
“If Brent crude is in the $50s per barrel range next year, and Russian Urals oil maintains the same discount to that, that would definitely cause them some problems,” said Heli Simola, a senior economist at the Bank of Finland who studies the Russian economy.
For eight straight months, OPEC+, an expanded grouping of the original cartel and nominally Russia, has increased its oil output targets despite what appears to be soft global demand for oil. (There is increased electrification in transport, for one thing, and a trade war, which has dimmed global growth and thus oil demand expectations.) There could be even more OPEC+ oil coming down the pike, now that Iraq can export crude through Turkey again. And that return of ample supplies is coming at a time when other oil producers, including the United States, Brazil, and Guyana, are also filling up the bathtub. The result is what clearly seems to be an oversupplied market, perhaps one reason why oil prices have fallen 11 percent in just three weeks.
But that gusher is set to continue next year, leading some forecasters to expect benchmark oil prices in the $50s a barrel range, down even from today’s sliding low $60s and a far cry from the nearly $80s a barrel oil briefly flirted with during the June escalation in the Middle East. That could be especially intense in the always weak first quarter of the year, when demand flags globally. Making things even more dire for Russia is that Urals, the grade of crude it markets, sells at a whopping discount to that—about $12 a barrel cheaper or even more when shippers need to evade sanctions and convince wary buyers.
Given that even Russia’s revised budget for next year is predicated on the price of its Urals oil getting more, not less, expensive (to $59 a barrel), it appears that the Kremlin’s optimistic fiscal plans for 2026 are facing a painful reality check.
“Their current budget framework reminds me of August 2022, when they expected spending to decline in 2023, but then the war didn’t go the way they were hoping,” Simola said. “If the war keeps not going well, they may need to increase, not decrease, defense spending next year, and that combined with an optimistic take on oil revenues” could lead to a budget deficit of 3 percent of GDP, the highest since the war began.
That’s a small number in a European—let alone U.S.—context, where runaway annual budget deficits are already 6 percent of GDP before the impacts of the Trump administration’s latest spending bill become apparent. But the United States can still borrow quite cheaply; Russia cannot.
“In the Russian context, [3 percent] is a lot. For Russia, it is different because it is restricted in borrowing, has no foreign money, and they have spent a lot of their savings from the oil fund,” Simola said.
But all that depends on what exactly is happening with the oil market. Big forecasters such as the International Energy Agency (IEA) expect sluggish growth in demand for oil to be overwhelmed by a surge of new and unneeded supplies; plenty of market analysts share that bearish view. But OPEC itself expects oil demand—led almost exclusively by middle- and lower-income countries, especially in Asia—to run twice as hot as the IEA does, so the cartel expects that its open taps will be needed to satisfy an oil-thirsty world.
The IEA keeps tabs on the balance in the global oil market by looking at inventories, and while those may not be perfect metrics, they suggest that the IEA’s bearish expectations are a little closer to the mark than OPEC’s expectations of red-hot demand, said Jacques Rousseau, a managing director at ClearView Energy Partners, a Washington-based energy consultancy.
“OPEC may be somewhat right about demand being a little higher than the IEA thinks but not at the level they think it is. It is not double,” Rousseau said.
OPEC may have to rethink the recent supply increases at its next meeting in November if a big market surplus really looks to be in the cards. But the cartel, or at least the subset of OPEC nations that have driven the recent supply increases, had all sorts of reasons to open the taps. Plenty of producers (such as Kazakhstan) have been cheating on production quotas, leaving kingpin Saudi Arabia to take the hit, and Riyadh may be fed up.
There is also the chance that geopolitics could yet knock out a chunk of the world’s oil supply: whether tougher Iran sanctions, U.S. military action in Venezuela, or Indian acquiescence to U.S. demands to stop buying Russian oil.
There are other reasons that OPEC may have kept ramping up supply this year despite slowing global growth. U.S. President Donald Trump has repeatedly called for lower oil prices, and that might be one way to get in his good graces. Or OPEC countries may simply want to regain market share from Western—especially U.S.—rivals, who just can’t compete with oil below $50 a barrel.
“Since 2016, big OPEC countries had started to trade market share for a higher price, and we’re now seeing the other side, where they are willing to trade price for more market share, and of course it doesn’t hurt to keep on the good side of Trump with lower oil prices,” Rousseau said.
In any event, market mechanics aren’t the only thing threatening Russia’s energy earnings. Ukraine’s long-range drone offensive against Russian refineries and oil installations has created gas lines in a huge oil-producing country and pushed even more cheap Russian crude away from damaged refineries and onto global markets, where it gets discounted even further. Now that Ukraine is hammering oil depots and pipelines, that offensive may actually start to impact Russian oil production, not just its refiners. (In response, Russia has greatly intensified its own energy war on Ukraine, with six major strikes on Ukrainian gas fields and installations ahead of winter.)
Then there is the steady sanctions pressure. The European Union is working on its 19th package of Russian sanctions, which will further crimp Russian energy businesses and banks as well as blacklist more of the “shadow fleet” tankers that Russia uses to evade Western sanctions. Britain just followed suit this week with tough sanctions of its own, blacklisting Russia’s top two oil companies, more than 40 tankers, and a handful of Chinese ports that are conduits for illicit cargoes of Russian oil and gas.
And the United States, while not adding any fresh Russia sanctions during the second Trump administration, has tried to dissuade big buyers of Russian energy, such as India, from continuing to do so by levying stiff tariffs on those countries. Most recently, U.S. Treasury Secretary Scott Bessent reiterated threats to do something similar with Russia’s main customer, China, though the United States wants Europe to take the lead in punishing Beijing.
The upshot is that an outlook for the Russian economy that was already grim may get a whole lot grimmer next year, with few easy options for the Kremlin to make things better.
“I think they are getting worried that they will have to use some of these measures they did not want to have to use, such as increased taxes and cutting other spending,” Simola said.
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