Will higher oil prices save the Russian economy?

In this video, I discuss whether the war in the Middle East and the closure of the Strait of Hormuz will save Russia's war economy.
Watch the video here or read the transcript below. I am again experimenting with a new video player, so if you run into problems, please let me know in the comments.

Best,
Anders

Transcript:

Hi. It has received a lot of attention that the oil prices are going up. I think that's pretty hard to miss, and that's a result of the war in the Middle East and the fact that Iran is blocking the Strait of Hormuz. This benefits Russia in the sense that the oil prices are going up, and they export oil, so they make more money.

Until recently, Russia was actually selling oil at a loss because they need to give discounts because of all the sanctions and the risks of secondary sanctions on the buyers of Russian oil. So they need to give discounts to countries such as China, India, etc. to take Russian oil. And they were actually selling that at a loss a few months ago. But now the oil prices are very high and Russia is again selling oil at a profit.

So there's a lot of talk about how the Russian economy is now being saved by this war in the Middle East and the fact that the oil prices are high. And I just want to add a few things to nuance that picture a little bit. I think we should be careful not to overestimate the extent to which this is helping Russia and how the Russian war economy is all of a sudden great and sustainable.

First I will say that the Russian economy is overall just really bad. They have run out of money. They are printing money. The way they are doing that in practice is that the central bank is giving money to the banks, which is then purchasing bonds from the government so that money runs back into the state budget. But basically, that's just the modern version of printing money. They have a very high degree of people who cannot pay off their debts. The banks are weak. There is a risk of a banking crisis. Inflation is high. Pretty much everything in the Russian economy is bad.

And then now we have this thing with the oil prices going up, and that helps a little bit. But overall, all the indicators are bad. And that also means that the Russian economy is in an extremely bad shape to handle rising global inflation. Russia still imports many things from other countries. They might not be able to import things directly from many Western countries, but they can then do it through middlemen and evade sanctions in that way.

That means that if there is inflation globally, the prices of those things will also increase, and that will further push to inflation in Russia. And their economy is just not geared to handle that. So the things that we see actually is that the Russian Central Bank and different kinds of financial institutions in Russia are very concerned about the situation in the Middle East. They're not at all celebrating that the oil prices are high right now. They are instead talking about the risks of increased inflation as a result of that.

So I think it's important to be aware that things are not necessarily great just because the oil price is high for Russia. And another thing I think it's also important that we don't miss is the fact that Ukraine's long-range strikes are getting more and more impactful on Russia's ability to export oil. Just this week, we've seen massive strikes on the ports in the Baltic Sea. That is the port in Primorsk, the port in Ust-Luga, and the port in Vyborg, all close to St. Petersburg.

These are massive strikes. If we look at the capabilities that Ukraine had in 2025 when they started hitting Russian oil refineries, that was impactful in the sense that there were suddenly many strikes. Ukraine suddenly had the capability to hit these things that they didn't have before in regular attacks. But they were still small because they were smaller drones with smaller warheads.

But what we're seeing now is much larger units that Ukraine can field. It's missiles. In the case of these attacks this week in the Baltic Sea, it's an airplane kind of things fitted with large warheads. So, these are very damaging strikes. And Ukraine suddenly has the capability to do that.

Right now, Russia has three of these very large ports that they use for oil exports. Two of them have been struck this week. It's the one in Primorsk and the one in Ust-Luga. The third one is in Novorossiysk in the Black Sea, which has already been hit. So Ukraine has taken out the three large ports that Russia uses for oil exports.

Currently, it's assessed that about 40% of Russia's export capacity has been taken out in one way or another as a result of Ukrainian strikes and the war in general. And this is, of course, going to continue. Ukraine is not going to stop here, especially with rising oil prices. They're not going to just sit around and look at the Russians suddenly making their war economy sustainable as a result of rising global oil prices.

So I think it's important that we are just aware that despite this thing going on in the Middle East, the Russian war economy is still actually pretty screwed. And there are still many things that point to this being a very, very tough year for Russia. And of course, there is also still the possibility that the war in the Middle East could be sorted out and the oil prices might be going down again in a few months.

So that's just what I wanted to add here, that it's more complicated and things are still tough for the Russian economy.

See you next time.