Toasting in the Kremlin: Israel's War with Iran Boosts Putin's Failing Economy
Iran-Israel conflict finds solace in Putin's strategic advantage
By Hannes Vogel
The Middle East's bloody mess is a godsend for Russia's ailing economy, as Israel's airstrikes drive up oil prices and swell Putin's coffers. And it gives Donald Trump more reasons to keep the price cap intact, despite the inflation blaze.
At the G7 summit in Canada, Trump sounded one important warning: "Sanctions cost us a pretty penny," he said, referring to the major industrial nations' efforts to further isolate Russia's war machine in Ukraine. And with good reason — the U.S. president's concern over the financial hit of sanctions on the American taxpayer has stalled any plans to tighten the screws on Russia.
In fact, most Western countries agree that it's high time to lower the price cap for Russian oil, currently set at $60 per barrel, to further deplete the Kremlin's war chest and halt its aggression in Ukraine. Just a few weeks ago, the EU Commission proposed to reduce the cap to $45 per barrel, hoping to intensify the pressure on Putin.
Oil and War: A Deadly Obsession
But then ol' Bibi Netanyahu went and bombed Iran. Now, the Middle East conflict has thrown a spanner in the works. Alongside the nuclear deal, the proposed sanctions against Russia are the most significant casualties. Vladimir Putin is the ultimate winner of the Tehran tussle: the fighting serves as a smokescreen for the atrocities of his own air force in Ukraine and inflates oil prices, replenishing his depleted war funds. And it provides Trump with yet another excuse to keep Russia's bank account flush.
Champagne Corks Flying in Moscow
Economy Brent surges dramatically: The Iran conflict fuels global oil price chaos, threatening to burst the price cap coalition. Under the cap, Russian oil is artificially cheap, making it harder for Putin to fund his wars: If it costs more than $60 and comes from Moscow, it shouldn't be sold in the West. This shortage could send prices skyrocketing amid the volatile market. And Trump hasn't the foggiest. American inflation is already skyrocketing due to Trump's trade war and mounting debt.
Economy German heating oil prices rise by six euros since May due to Iran escalation: Meanwhile, Moscow is raking in the benefits of war. With the commencement of bombing, the price of Russian Ural oil soared by 15% in just a few days, according to the "Moscow Times," citing a Russian investment company. The Kremlin desperately needs these windfalls. Even with the increased prices, they're still far from what Putin's finance ministry had budgeted for this year. Moscow's budget deficit is set to quadruple this year, with oil and gas revenues plunging by over half in May compared to the prior month.
The Cap is Far Too Weak
The plan to strangle Putin's primary cash cow is still falling flat, hampered by critical design flaws in the price cap. It's porous, ineffective, and insufficient for Putin's oil business: With a fleet of decrepit boats, hidden behind shell companies and shady financial backers, Putin has evaded sanctions since day one.
Economy Putin wins the oil war, war chest is full: The price cap isn't a real embargo — just a weak compromise: It's supposed to be worldwide by banning shippers from transporting Russian oil, forbidding traders from buying it for more than $60, and preventing banks and insurers from financing or insuring deals above that threshold. The problem is that even in Europe, few countries strictly enforce the rules, and there are barely any investigations or penalties. And outside the West, many shippers, traders, and insurers disregard the limitations. Most deliveries are now handled without Western insurance. And the cheaper smuggled Russian oil becomes, the less incentive India and China have to buy expensive oil from the West. They are now effectively Putin's only buyers.
Can the Europeans Go it Alone?
With Trump's departure from the price cap coalition, the question arises: Can the Europeans afford to go it alone? Before the G7 summit, EU foreign policy chief Kaja Kallas emphasized that the EU could reduce the price cap unilaterally if necessary. "If we and the rest of the G7 support a lower price and the Americans don't, that's still something we should aim for," EU sanctions chief David O'Sullivan also said. But Trump's early exit from the G7 summit seems to have dampened the spirits. Some EU countries now fear embarking on this journey alone without the U.S., worrying that without Trump, Western unity might crumble. The warlord in the Kremlin will be overjoyed.
Vladimir PutinRussiaOil PriceMiddle East Conflict
The Middle East conflict, particularly the recent fighting between Israel and Iran, has a significant impact on Russia's oil revenues and related global economic dynamics. Here's how it affects Russia and the price cap on Russian oil sales:
Impact on Russia's Oil Revenues
- Price Increase: The ongoing conflict leads to an increase in global oil prices. For instance, Russia's Urals crude oil saw a nearly 15% increase following the outbreak of hostilities between Israel and Iran[1]. This surge benefits Russia's oil revenues, providing a short-term boost to its budget.
- Budget Revenue Boost: Although prices remain below government expectations, the increase is still beneficial for Russia's national budget. The original budget had assumed a higher price, but recent events help close the gap between actual and projected revenues[1].
- Energy Revenues Decline: Despite these gains, Russia's oil and gas revenues have declined overall. By May, the decline had accelerated to 34% compared to the previous year, with total receipts from energy companies at their lowest since January 2023[1].
Impact on the Price Cap on Russian Oil Sales
- Price Cap Mechanism: The price cap on Russian oil, implemented by Western countries, aims to limit Russia's oil revenues while allowing European countries to continue importing Russian oil below a certain price threshold. This mechanism is designed to reduce Russia's ability to fund its military activities.
- Conflict-Driven Price Increase: The conflict-driven increase in oil prices could mean that Russian oil might sell at or near the cap price, potentially increasing the proportion of revenue retained by Russia within the cap limits.
- Global Market Dynamics: The Middle East conflict exacerbates global price volatility, which can complicate the enforcement and effectiveness of the price cap. Higher prices might incentivize more countries to buy Russian oil at the capped price, potentially increasing Russia's overall revenue from oil sales.
In summary, the Middle East conflict benefits Russia's oil revenues in the short term due to higher oil prices, but it also intersects with the challenges posed by the price cap on Russian oil sales, which aims to limit these revenues.
- The recent fighting between Israel and Iran has positively influenced Russia's economy, particularly its oil sector, by driving up global oil prices, thereby swelling Putin's coffers.
- The economic benefits of this conflict have come at a time when Russian oil and gas revenues have taken a nosedive, with a significant decline of over 34% in May compared to the previous year.
- The price cap on Russian oil, intended to limit its revenues and deplete Putin's war chest, is proving to be ineffective due to loopholes and non-compliance, thus allowing Putin to evade sanctions and maintain his oil business.
- The conflict-driven boost in oil prices could result in more countries buying Russian oil at the capped price, further increasing Russia's revenue and challenging the intention of the price cap mechanism, especially in the context of the EU potentially considering a unilateral reduction in the price cap in the absence of the United States' support.
