Scraping the barrel

The average price for a barrel of benchmark Urals crude oil at a port in the Baltic or Black Sea was $45 in November, but had already fallen to $40 a month later. In late December and early January, the price further tumbled to $35 per barrel. Though the price has since recovered to $40–$43, that’s still far lower than the projections made in the Russian budget. How will the fall in oil prices affect the Russian economy and the day-to-day lives of Russians?

The price of Russian oil didn’t solely depreciate due to the additional US sanctions levied on Gazprom Neft and Surgutneftegas, two of the country’s biggest oil exporters a year ago, but also due to the dangers of buying and transporting Russian gas. The Armed Forces of Ukraine (AFU) are increasingly attacking Russian ports and oil tankers in the Black Sea, with the most recent strike taking place on 13 January near the port of Novorossiysk.

Even though attacks on oil infrastructure and instability in oil-producing regions usually lead to an increase in oil prices, the attacks in the Black Sea have actually lowered the price of Urals crude. Though transporting oil through a war zone inevitably ups the cost of insurance premiums, these increases aren’t shouldered by the exporters, but are passed on to the oil companies themselves. 

Of bigger concern to Russian oil extractors is the fact that they are required to pay a mineral extraction tax that can be as high as $37 per barrel, which is obviously no joke when the barrels themselves typically sell for between $35–45. Even though only a quarter of all Russian oil producers pay the full extraction tax rate, with the remainder paying anywhere between 0% to 60% of that depending on how complex the extraction process is, the fact remains that for those paying full rate, oil production at current prices is not only unprofitable but results in a net loss.

Aside from the extraction tax, Russian oil producers must also pay pipeline owner Transneft to transport the oil to port, which costs about $5 per barrel, and cover its own production costs, which average $10 per barrel. This means that only producers paying the mineral extraction tax at a preferential rate can still turn a profit. 

It is therefore safe to assume that this year oil producers will wage a fresh battle with the government for tax breaks. However, given that Russia is in the early days of a recession, the country’s oil barons will not be the only captains of industry asking the Finance Ministry to grant them preferential terms.

The Finance Ministry, in turn, is hardly in a position to grant such terms, as the budget requires it to collect 8.9 trillion rubles (€98.5 billion) of oil and gas revenue this year. For that to happen, the price of Urals needs to be $59 per barrel, which at present seems like a pipe dream.  

By contrast, the price of Brent had risen to $66 by mid-January due to the uprising in Iran and expectations of US intervention in the country. However, the price forecast for the global benchmark is much lower, and ranges from a figure of $61 a barrel from a survey of 34 economists, to a more gloomy forecast of $56 for 2026, sinking to $54 in 2027, by the US Energy Information Administration. 

With those prices and ongoing hostilities in the Black Sea, there is little reason to think the difference in price between Urals and Brent, currently between $20 and $25 per barrel, will narrow any time soon. At most, Russian crude will be trading at $45.

The Finance Ministry should therefore brace itself for the budget deficit to increase by between 1.5 trillion (€16.4 billion) and 3 trillion rubles (€32.8 billion), depending on the oil price and the ruble/dollar exchange rate. The losses will be minimised if the ruble falls in value to 92.2 rubles to the dollar, as foreseen in the budget, in which case the treasury would only lose about 1.5 trillion to 2 trillion rubles (€21.9 billion). 

However, if the ruble remains as high as it is now, at about 80 rubles to the dollar or lower — in 2025, the average exchange rate was about 84 rubles — the budget will have a shortfall of some 3 trillion rubles, or 34% of the planned oil and gas revenues, Daniel Stephens*, an economist at a foreign bank in Russia told Novaya Europe.

This alone won’t necessarily make the Kremlin end its war in Ukraine, of course. Defence spending of 12 trillion rubles (€131.3 billion) — 27% of state expenditure — won’t end due to a shortfall of a couple of trillion rubles. If they’re going to cut expenditure, it will be in other sectors, not in the military-industrial complex. Nonetheless, the Finance Ministry will have to look for ways to plug the hole, and there are no good options in 2026 “because of bad political priorities”, Stephens told Novaya Europe.

There are only three ways for the Finance Ministry to bridge a funding gap: borrow money, withdraw it from the National Welfare Fund (NWF) or raise taxes, none of which would augur well for either the budget or the economy. Though Russia can borrow on the domestic market easily enough, as government debt is relatively low at 16% of GDP, this will make borrowing more difficult in the future. In addition to that, new loans now cost more following a rise in interest rates on federal loan bonds in the second half of 2025.

The head of a Russian economic research centre told Novaya Europe that, given the implications of borrowing on the domestic market, the only realistic options were raising taxes or using what little funds remain in Russia’s once-mighty NWF, which has been used again and again to make up shortfalls in the federal budget. If oil remains cheap, the NWF would only be able to cover two years worth of Russian spending given that it has just over 4 trillion rubles (€43.8 billion) in liquid assets in it. 

Which leaves the tax option. The economists we interviewed said the authorities can go one of two ways: increase VAT — the increase from 1 January to 22% from 20% will bring in another 1.2 trillion rubles (€13.1 billion), while other tax reforms will scrape together a further 500 billion rubles (€5.5 billion) — or increase income tax. In 2025, the treasury brought in an additional 600 billion rubles (€6.6 billion) that way. 

However, increasing VAT will add one to two percentage points to inflation, while slowing the economy, which is already teetering on the brink of recession, potentially creating a vicious circle, as the predicted budget revenue will fall short without economic growth.

A second possible option would be to increase taxes on the oil and gas sectors, Stephens told Novaya Europe. “Oil and gas taxes of $1.64 billion based on $1 per barrel for 2026 are lower than in 2025 — $1.73 billion — and the high point of $2.2 billion in 2022,” he said.

The problem with this method is that it most likely means stripping oil and gas companies of their tax breaks, which are currently enjoyed by three quarters of Russian oil producers, as well as the country’s largest liquefied gas producer, Yamal LNG. However, given that Russia’s fossil fuel industry is controlled by people close to Vladimir Putin — Igor Sechin, Alexey Miller, Gennady Timchenko and Leonid Mikhelson — it is extremely difficult to predict the outcome of their lobbying battle with Finance Minister Anton Siluanov.

*Name changed at request of contributor