Russia's oil price drops to two-year low, Kremlin faces painful choices – Reuters

The price of Russian oil in roubles has fallen below RUB 4,000 (about US$49) per barrel – its lowest level in the past two years and 40% less than what is set in the state budget.

Source: Reuters

Details: Reuters estimates that the average price of Russia's mix of Urals and ESPO blends has dropped to US$48.92 per barrel, or RUB 3,900. This is far below the level set in the Russian state budget – RUB 6,700 (about US$83).

It is the lowest price since May 2023 and also well below the revised government forecast of RUB 5,281 (about US$65) per barrel, which is used for tax calculations.

Despite this, Russia has already increased its military spending for 2025 by a quarter – to 6.3% of GDP, the highest since the Cold War. The war against Ukraine has entered its fourth year.

Many analysts believe the Kremlin will be forced to raise taxes, cut social spending and increase borrowing if it wants to balance the budget without reducing defence expenditure.

The decline is linked to expectations that global oil production will outpace consumption. Over the past six trading sessions, global oil prices have dropped by more than 10%, and since April, they have fallen by over 20%. At that time, statements by US President Donald Trump regarding trade tariffs raised fears of a global economic slowdown.

The decision by the Organisation of the Petroleum Exporting Countries (which includes Russia) to accelerate the pace of output growth has also affected oil prices.

On Monday, Trump stated that both Moscow and Kyiv want to end the war and that Russian ruler Vladimir Putin has become more inclined towards peace following the latest drop in oil prices.

Energy resources provide about one-third of Russia's budget revenues. Due to falling prices, the government last week increased its 2025 budget deficit forecast from 0.5% to 1.7% of GDP. This came after it lowered its energy revenue forecast by 24% due to expectations of a prolonged period of low oil prices.

Background:

• Due to the decline in oil prices, Russia's budget deficit has surged, prompting the government to revise its financial indicators.
• US President Donald Trump stated that the fall in oil prices increases pressure on Russia and raises the likelihood of a peace agreement to end the war in Ukraine.

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