A Financial Crisis Looms Over Russia: The Impact of Oil and Saudi Arabia

Russia Faces Liquidity Crisis Amid Saudi Oil Strategies

Russia could find itself struggling with liquidity due to Saudi Arabia’s oil strategies.
The sale of crude oil and gas has been the largest source of revenue for the Russian state over the past decade, contributing to half of the country’s budget.
Moscow’s war economy heavily relies on these valuable resources, effectively overcoming obstacles posed by Western sanctions.

It is already known that Russia has developed a “shadow fleet” of aging ships to transport its oil, circumventing the cap of $60 per barrel imposed by the G7 countries.
This avoidance of restrictions has netted the Kremlin nearly $25 billion since the onset of large-scale invasion.

A loophole also allows intermediaries from countries like Turkey, China, and India to refine Russian oil into gasoline and diesel before selling it elsewhere, free from sanctions.
Within this context, Saudi Arabia’s role in manipulating oil prices is crucial.
Could the Kingdom’s actions ruin the Russian economy?

Saudi Arabia’s Potential Impact on Russian Finances

Analysts suggest that Moscow may be on the verge of financial shortages to sustain its wartime economy if Saudi Arabia follows through with its plans to ramp up crude oil production to reinforce its status as the global oil leader, according to an analysis on Politico.eu.

This scenario seems plausible in light of current global economic and geopolitical dynamics.
Riyadh seems increasingly frustrated with the inability of other oil-producing nations to cut supply to boost oil prices to around $100 per barrel, far above the current price of $70.

Oil traders indicate that Saudi Arabia is likely determined to produce and export more oil to capture market share and profits, even with decreasing prices.
Recent reports from the Financial Times suggest the Kingdom might abandon its ambitious goal of limiting crude oil output to elevate prices around $100 per barrel.

Experts agree that the Kingdom possesses significant production and export capacity, enabling it to shift strategies toward market dominance via volume.
More crude oil entering the market amidst uncertain economic growth would likely lower prices but increase Saudi sales.

As Ajay Parmar, director of oil market analysis at ICIS, stated, “The global economy is rather slow, and oil demand isn’t as high as the Saudis desire,” indicating that some producers, including Russia, continuously exceed their quotas.
This situation means prices are nowhere near the $100 threshold, and frustration is mounting in Riyadh.

The Stakes for Russia Are High

Alexandra Prokopenko, an economist at the Carnegie Endowment for International Peace, highlights, “At current exchange rates, a $20 drop in oil prices could lead to a revenue decline of 1.8 trillion rubles (about $20 billion), roughly 1% of Russia’s GDP.”

The Russian government would face a tough choice between cutting spending—a scenario unlikely during wartime—or succumbing to inflationary pressures and crippling interest rates.

Together with countries like Kazakhstan and Iraq, Russia has been accused of exceeding agreed production levels with the OPEC+ cartel.
Despite promises to align its production with the target of 8.98 million barrels per day, Moscow consistently surpasses its voluntary quota.

Despite Western sanctions imposed due to the Ukraine war, the Russian finance ministry claims that fossil fuel profits surged by 41% in the first half of this year.
Nonetheless, even if Saudi Arabia proceeds with its strategy, it is unlikely that a cash-strapped Kremlin will reverse its course in the Ukraine conflict, having budgeted its national expenditures expecting oil to be sold at around $70 per barrel—figure which many are reluctant to pay.

Heli Simola, a researcher at the Bank of Finland, pointed out, “Signs of imbalance in the economy are rising, but Russia can continue to finance the war for a while.
The war will not cease simply because it runs out of money.”