The Russian oil economy has fallen into a paradoxical trap. Cheap oil crashes tax revenues, widens the budget deficit, and accelerates the depletion of state reserves. Expensive oil strengthens the ruble, increases payments to oil companies, and deprives Urals of its main advantage in Asian markets—the discount. Meanwhile, damage to oil refineries creates an even more dangerous chain reaction: reduced refining leads to bottlenecked logistics, then to a decline in production, after which the state loses mineral extraction tax revenues regardless of global price benchmarks.
This is precisely the new reality of the Russian oil industry. It no longer depends solely on the price of a barrel. Its profitability is determined by multiple variables at once: the Urals discount to Brent, the ruble exchange rate, freight costs, tanker availability, the state of oil refining, the capacity of ports and pipelines, buyer sanction risks, fuel damper compensations, and the intensity of Ukrainian strikes.
In early July, Urals indeed dropped below the budget target: during the first three days of the month, its average price at Western ports was estimated at around $41.66 per barrel, and on July 2, it was about $51. However, by July 17, a new escalation between the United States and Iran pushed Brent above $84. This does not resolve the crisis of the Russian oil model. Even with rising global benchmarks, the Urals discount for Indian buyers in early July exceeded $10 per barrel, and Russian oil remained burdened with additional costs for transport, insurance, and sanctions compliance. The crisis for Moscow is no longer about another price collapse; it is that Russia's oil system has begun to lose money under any market conditions.
"Weaned Off the Oil Habit"—Or Simply Getting Less From It?
On July 1, Deputy Prime Minister Alexander Novak called the decline in the share of the fuel and energy sector one of the key structural changes in the Russian economy. According to him, the fuel and energy complex previously accounted for about 18–20% of GDP, whereas its share has now shrunk to 13%. Within the structure of budget revenues, the decline looks even more convincing: from 42% to 22%.
Formally, the figures support the narrative of reducing oil and gas dependency. In 2025, the federal budget's oil and gas revenues fell by 23.8% to 8.48 trillion rubles—the lowest level since 2020. However, this is not the result of a technological leap, increased productivity, or the emergence of new export industries. Russia has not replaced oil revenues with income from microelectronics, pharmaceuticals, aircraft manufacturing, or high-tech services. It has simply started receiving less from hydrocarbons while simultaneously raising taxes on the rest of the economy. The base corporate income tax rate for most organizations was increased from 20% to 25%. Effective January 1, 2026, the VAT rate rose from 20% to 22%, and the pool of taxpayers expanded. In other words, the falling share of oil and gas revenues is partially offset by increased tax pressure on businesses and consumers.
The Center for Macroeconomic Analysis and Short-Term Forecasting captured this substitution with particular clarity. From January to April 2026, budget system revenues grew by only 1.7%, while oil and gas revenues plummeted by 38%. Non-oil and gas revenues increased by 9%, but primarily due to consumption taxes, which rose by 18%, and insurance contributions, which added 11%. Taxes on income and profits grew by only 6% amid weakening financial results of organizations. Revenues from taxes, fees, and payments for the extraction of non-oil and gas resources increased by 22%, partly due to high gold prices. Customs duties decreased by 14% due to the strengthening of the ruble. This is not diversification; it is a fiscal replacement of lost oil rent with taxes on consumption, profits, and payroll.
In a war economy, such a model can temporarily sustain nominal growth in budget revenues. However, its limit is obvious: taxes cannot be raised indefinitely in an economy where corporate profits are shrinking, credit remains expensive, investment activity is weakening, and a significant portion of government spending does not create civilian productive assets.
In this framework, the declining share of oil and gas revenues indicates not liberation from resource dependency, but the degradation of the very resource base that underpins budget sustainability.
The State Simultaneously Collects Oil Rent and Returns It to Companies
The Russian oil and gas sector is a vertically integrated oligopoly in which the state acts as the regulator, tax beneficiary, largest shareholder, lender, and provider of subsidies.
The primary channels for extracting oil rent remain the mineral extraction tax (MET) and the excess profits tax (EPT). In 2025, MET revenues decreased by 24% to approximately 8.5 trillion rubles. The EPT, introduced in 2019 and more sensitive to oil prices, the ruble exchange rate, and transportation costs, yielded about 1.6 trillion rubles—roughly 20% less than the previous year.
Rosneft remains the industry's largest taxpayer. According to Igor Sechin, in 2025 the company transferred 5 trillion rubles to budgets of all levels, compared to a record 6.1 trillion rubles in 2024. Revenue stood at approximately 8.2 trillion rubles, EBITDA at 2.2 trillion, and net profit at 293 billion rubles. Liquid hydrocarbon production decreased from 184 million tons in 2024 to 181.1 million tons in 2025. The company attributed this trend to changes in the government's production quota. However, Rosneft does not just pay the state; it systematically receives tax breaks.
The Samotlor field, which peaked in production back in 1980, has received annual tax deductions of approximately 35 billion rubles since 2017 under favorable market conditions. Starting in 2024, the volume of this subsidy reached 50 billion rubles. These funds made it possible to slow the average decline in production from 5% per year in 2008–2017 to about 1%.
The Priobskoye field receives comparable support—about 45.96 billion rubles a year. Its operating company, RN-Yuganskneftegaz, controls 40 licensed blocks in the Khanty-Mansi Autonomous Okrug and accounts for about 30% of Rosneft's production.
Promising assets include the Vankor cluster and Vostok Oil, which have a declared resource base of about 6.5–7 billion tons of low-sulfur oil. However, Arctic projects require massive capital investments, complex logistics, and technologies to which access is restricted by sanctions.
LUKOIL produced about 75 million tons of oil in Russia and transferred approximately 1.33 trillion rubles in taxes for 2025, excluding corporate income tax. Gazprom Neft, with a record production of 130.7 million tons of oil equivalent, reported about 979 billion rubles in tax payments. Concurrently, the company receives a temporary annual tax deduction of 13 billion rubles—totaling 79.2 billion rubles from April 2023 to March 2029, with subsequent repayment between 2029 and 2035. This highlights the fundamental contradiction of the Russian oil model. The budget relies on maximizing rent extraction, but an aging resource base requires ever-larger subsidies. The state needs taxes today, while companies need investments to sustain production tomorrow. The stronger the fiscal pressure, the more compensation the industry demands. The more compensation, the smaller the net budgetary benefit of expensive oil.
Gazprom Has Lost Europe; NOVATEK Risks Being Next
The gas sector has experienced a deeper structural collapse than the oil sector.
In 2022, Gazprom transferred over 6.6 trillion rubles to budgets at all levels. At the time, windfall taxes and high European prices allowed the state to extract a significant portion of export rents. However, following the shutdown of Nord Stream, a sharp reduction in European imports, and the halt of Ukrainian transit, the company's financial value to the budget has diminished.
In 2025, Gazprom's production totaled about 405 billion cubic meters, a decline of 2.6%. The key resource hubs remain the Bovanenkovo field on the Yamal Peninsula, with initial reserves of about 4.9 trillion cubic meters, and the Chayanda field in Yakutia.
NOVATEK produced 84.6 billion cubic meters of natural gas and 14.1 million tons of liquid hydrocarbons. Its revenue decreased by 6.5% to 1.45 trillion rubles, while its net profit plunged by approximately 63% to 183 billion rubles. The reasons include exchange rate fluctuations, lower prices, write-offs, and sanctions pressure. The corporate income tax rate for LNG producers, which was 34% in 2024–2025, has been reduced to 25% starting in 2026. The Arctic LNG 2 project, following US sanctions, has been effectively frozen as a fully functional commercial export facility. The primary operating asset remains Yamal LNG in Sabetta.
Here, a new threat emerges for Russia. In the first half of 2026, the EU imported a record 9.97 million tons of liquefied natural gas from Yamal LNG—16% more than the previous year. Over 97% of the project's shipments were bound for European ports. However, this growth reflects a rush to lift contracted volumes before bans take full effect, rather than a strengthening market. The European Union has already approved a phase-out: imports of Russian LNG are set to cease entirely by early 2027, and pipeline gas by the fall of that same year. The challenge for Yamal LNG is not limited to finding new buyers. Arctic logistics depend on specialized Arc7-class icebreaking tankers, European ports, maintenance facilities, and insurance and financial services. The ban on transshipment through Zeebrugge and Montoir has already complicated the transfer of cargo from the icebreaking fleet to conventional LNG carriers.
Moscow can redirect some LNG to Asia, but the Northern Sea Route is seasonal, expensive, and infrastructure-constrained. For NOVATEK, Europe was not just a buyer; it was an integral part of the project's transportation network.
Drones Are Not Just Hitting Gasoline—They Are Hitting Production and the Budget
Russia operates 38 medium- and large-capacity oil refineries with a combined potential of about 330 million tons per year. In 2024, actual refining was approximately 267 million tons—the lowest since 2012. Even then, performance was impacted by maintenance shutdowns, sanctions restrictions, and Ukrainian attacks. Now, the threat has escalated to a new technological level. Ukrainian drones have gained the capability to strike targets over 2,000 kilometers away. On July 6, an attack hit the Omsk refinery—Russia's largest, which processes about 460,000 barrels per day. It was considered one of the industry's key remote sanctuaries, located far beyond the previous range of reliable strikes.
The strike on Omsk shattered the illusion of safe oil refining east of the Urals. By mid-July, all ten of Russia's largest refineries had been targeted at least once, and the share of temporarily offline capacity was estimated by some sources to exceed a quarter of the industry's total potential. Following the intensified strikes, the International Energy Agency lowered its forecast for Russian production by 85,000 barrels per day for 2026 and by 150,000 barrels per day for 2027. Particularly painful has been the shift in Ukrainian tactics. Initially, attacks frequently targeted storage tanks and primary distillation units. Now, the priority has shifted to catalytic cracking, hydrocracking, reforming, and other secondary processes that convert crude oil into gasoline, diesel, and jet fuel.
Such processing units are manufactured in small batches, rely on imported components, and take months to repair. Replacing a storage tank or a pipeline does not compare in complexity to rebuilding a hydrocracker reactor, a compressor, a control system, or a catalyst complex.
Direct damage to oil and gas facilities from attacks in 2025 was estimated at over 100 billion rubles. Combined with lost revenue and indirect losses, the total exceeded 1 trillion rubles. In 2026, the scale of the attacks has grown further. Yet, the physical destruction of equipment is not the primary impact.
If a refinery shuts down, the extracted crude must either be exported, stored, or production must be cut. Russia cannot abruptly increase exports. Pipelines and ports are operating at capacity, the tanker fleet is constrained, buyers demand deep discounts, and sanctions against major companies are narrowing the pool of intermediaries.
This is why a blow to refining turns into a blow to MET and EPT revenues. In June, Russian crude exports rose to 5.8 million barrels per day, but oil product exports dropped by 230,000 barrels to 1.91 million. Concurrently, crude production fell to approximately 8.86 million barrels per day—nearly 900,000 barrels below the OPEC+ quota. According to industry sources, Russian refineries met only about 65% of seasonal gasoline demand. The deficit was estimated at 40,000–45,000 tons per day against a consumption of 115,000–120,000 tons. Authorities restricted fuel exports and increased imports, including from Belarus and India. Belarusian deliveries reached approximately 6,000 tons of gasoline per day. This is not just a localized problem for oil companies; it is a fiscal, logistical, inflationary, and military-economic crisis all at once.
Seaports Have Become the Oil Bottleneck
After 2022, Russia redirected a significant portion of its oil exports from Europe to China, India, and Turkey. Seaports became the primary channel for this pivot.
In 2025, Russian ports handled 274.9 million tons of crude oil - 2.8% more than in 2024 - and 37.2 million tons of liquefied gas. Conversely, oil product exports decreased by 7.7% to 121.1 million tons. In the Baltic, the main direction relies on Ust-Luga and Primorsk. About 700,000 barrels of oil and oil products are shipped through Ust-Luga daily, including NOVATEK's stable gas condensate. The port and its associated infrastructure have repeatedly come under attack. On July 6, 2026, new strikes damaged facilities in Ust-Luga and Vysotsk.
Primorsk, the terminus of the Baltic Pipeline System, is capable of shipping over 1 million barrels of crude oil per day. On May 3, it became the main target of a massive attack, which triggered a fire and temporarily disrupted terminal operations. In the south, Novorossiysk remains a key hub with a capacity of about 700,000 barrels per day. On May 23, a strike caused a fire at the oil infrastructure. The 2025 revenue of the Novorossiysk Commercial Sea Port was 76.5 billion rubles, but downtime reduces more than just the operator's income. It disrupts shipping schedules, increases tanker queues, and inflates insurance costs.
The Caspian Pipeline Consortium terminal near Yuzhnaya Ozereyevka, which is capable of exporting about 75 million tons of Kazakh oil per year, is also vital for transit. Its 2025 transit revenue was estimated at approximately 173 billion rubles. Strikes on this infrastructure create a distinct diplomatic risk, as they damage not only Russia but also Kazakhstan.
Kozmino on the Pacific coast remains the most secure export hub. Approximately 46-50 million tons of low-sulfur ESPO blend oil pass through it annually, almost all of which is sent to China. However, Kozmino cannot absorb the West Siberian volumes that were previously refined in the European part of Russia. The Eastern Siberia - Pacific Ocean (ESPO) pipeline is operating virtually at full capacity.
Kozmino's geographical remoteness makes it safer from Ukrainian drones, but simultaneously turns it into a market with a single major buyer. China gains not only the oil but also the bargaining leverage.
Transneft Is Not Made of Rubber: There Is Nowhere to Put the Excess Oil
The state controls 78.6% of Transneft. Over 80% of the oil produced in Russia passes through its system. In 2025, the company transported about 447 million tons, of which 435 million tons was Russian oil and 12 million tons was Kazakh oil.
The group's revenue reached approximately 1.44 trillion rubles, an increase of 1.2%, though net profit decreased by 19.6% to 226 billion rubles. One of the reasons was the increase in Transneft's corporate income tax rate to 40% for the 2025-2030 period. The entire system was designed for a specific geography of flows: oil field to refinery to domestic market or export terminal. If several large refineries shut down simultaneously, it is impossible to reroute the entire freed-up volume to the ports through a simple administrative decision.
The ESPO pipeline transports about 80 million tons per year. Roughly 30 million tons go to China via the border crossing on the Amur River, and another nearly 50 million tons go through Kozmino. There is no reserve capacity here to reroute tens of millions of tons from the western direction.
The southern branch of the Druzhba pipeline continues to supply Hungary and Slovakia - about 9.7 million tons in 2025. The northern branch, directed toward Poland and Germany, has not been used for regular Russian exports since February 2023.
Oil pumping stations are therefore becoming particularly attractive targets. The cost of a station itself may be relatively small compared to a refinery or a port, but shutting it down can disrupt the flow for hundreds of miles. The Yaroslavl-3 pumping station, which serves the Surgut - Polotsk route, suffered two strikes in May that caused fires. Oil flows through connected routes to the largest Baltic ports.
Thus, the Russian oil system is facing a severe lack of flexibility. It has oil but lacks available routes. It has ports, but they are congested and vulnerable. It has buyers, but they demand discounts. It has tankers, but they are being seized, insured at inflated rates, or blocked from ports.
In a peacetime economy, surplus production is an advantage. In an economy under sanctions and strikes, it can turn into the necessity of capping wells.
China Replaced Europe in Statistics, But Not in Revenue
Before 2022, Russia supplied 175 million tons of oil to Europe annually. By 2025, that volume had shrunk to less than 25 million tons. The freed-up flows were redirected primarily to China and India, which now account for about 80% of Russian oil exports. However, this pivot has not been free of cost.
Before the full-scale war, the Urals discount to Brent was often around $12-13 per barrel. In November 2025, it widened to approximately $23.50. In December, Urals in Novorossiysk dropped to $34.50, and some batches sold even cheaper. In Primorsk, the price fell to around $36. Chinese refineries do not buy Urals out of political solidarity. They buy it when the discount covers the additional costs and risks.
Urals is heavier and sourer than many Middle Eastern grades. Delivering it from the Baltic or Black Sea to India takes longer than shipping from the Persian Gulf. The buyer must account for the likelihood of secondary sanctions, payment difficulties, tanker origin, insurance, transshipment, and banking availability.
With a discount of $20-25, this model is profitable. When the discount shrinks to $5-8, Russian origin no longer offsets the risk. An Indian refinery can buy Arab Light, Dubai, or American oil, gaining more transparent logistics and fewer payment headaches.
This is precisely why a high price for Urals is not always beneficial for Russia. During the Iranian crisis in April, spot prices rose above $114, and the average monthly price, according to the Russian side, was estimated at $94.87. However, the narrowing of the discount weakened the competitive edge in the Asian market.
After Persian Gulf shipments normalized, the discount widened again. In early July, batches for India sold for more than $10 cheaper than Brent. Concurrently, a decline in freight rates slightly eased the situation for exporters: transporting an Aframax cargo from Primorsk became cheaper, dropping from approximately $10-11 million to $7-8 million, while Suezmax from Novorossiysk fell from $15 million to around $10 million. But now, Moscow is more dependent on a balance determined by others: the war in the Middle East, decisions by Persian Gulf countries, demand from Indian refineries, the ruble exchange rate, and US sanctions policy.
The UAE's departure from OPEC and OPEC+ on May 1, 2026, added another source of pressure. The Emirates gained the freedom to increase production more rapidly and sharply boosted output in June. For Russia, this means the appearance of an additional competitor capable of offering buyers oil without the Russian sanctions discount.
The Gas Pivot to China Turned Out to Be a Replacement of the Buyer, Not the Market
In the gas sector, dependency on China is even tighter.
Nord Stream pipelines had a capacity of 55 billion cubic meters per year and were disabled in September 2022. Ukrainian transit, historically one of the primary routes to Europe, ceased on January 1, 2025, depriving Russia of infrastructure for another roughly 40 billion cubic meters annually.
The only major active route to Europe remains TurkStream, with a design capacity of 31.5 billion cubic meters. In 2025, about 18 billion cubic meters flowed through it toward Europe.
For comparison, in its best years, the European market absorbed 150 billion cubic meters of Russian gas or more. Russia gained not only volume but also multiple routes, competing buyers, a spot and contract market, and the ability to redistribute supplies.
Power of Siberia supplied 38.8 billion cubic meters to China in 2025 - 24.8% more than in 2024, and for the first time more than the entire volume of pipeline exports to non-CIS Europe combined with Turkey. However, a nominal replacement of volume does not mean a replacement of income. The Chinese contract price is linked to an oil-product basket and, according to analyst estimates, involves a substantial discount. Most importantly, Russia lacks an alternative. Gas from East Siberian fields cannot be quickly redirected to Europe, and Yamal gas cannot be sent to China. These are different resource bases and disconnected pipeline systems.
China understands that Moscow needs a buyer more than Beijing needs a specific Russian route. Therefore, bargaining power has shifted to the importer.
Europe was a highly lucrative market with several large economies. China is a single giant buyer capable of dictating prices, construction timelines, and financing terms.
The Shadow Fleet Has Ceased to Be Invisible
Following the introduction of the price cap, Russia established a large-scale shipping system involving aging tankers, opaque owners, shifting flags, obscure insurers, and third-country intermediaries.
This system allowed exports to be maintained, but its cost is constantly rising.
By 2026, the European Union had blacklisted hundreds of vessels. The United Kingdom alone announced sanctions against more than 550 tankers linked to Russia's shadow fleet; nearly 200 of them were forced to anchor or reduce activity. According to estimates by the German Institute for International and Security Affairs, about 17% of the global tanker fleet may already be linked to various shadow schemes. Since the beginning of the year, European nations have detained at least nine suspected tankers. In June, European naval forces intercepted three more vessels, including the UK's first such operation. The most dangerous precedent for Moscow arose in January when the US seized the tanker Marinera (previously named Bella 1) in the North Atlantic. The vessel had changed its registration and raised the Russian flag during a chase following operations off Venezuela. The American side claimed the registration was suspect; Russia called the intercept unlawful.
The significance of this episode goes far beyond a single tanker. The US demonstrated its readiness to deploy the Coast Guard, military aviation, and naval forces to physically detain a vessel in international waters. If this practice expands, the shadow fleet will turn from a means of bypassing sanctions into an expensive and unreliable asset. Every interception increases insurance costs, forces route changes, requires additional intermediaries, and raises the discount a buyer will demand for the risk.
US sanctions against Rosneft and LUKOIL, introduced in October 2025, amplified this effect. Together, the two companies provide about half of Russian production. Factoring in previously imposed restrictions on Gazprom Neft and Surgutneftegaz, approximately 80% of Russian oil production is now under US sanctions.
Now the Budget Pays Oil Companies for Its Own Vulnerability
Oil companies do not just pay taxes. The state compensates them for selling fuel on the domestic market at prices lower than the export alternative.
In May, the budget paid oil companies 204.3 billion rubles through the damper mechanism. In June, payments for May amounted to 210.6 billion rubles. Over the first five months of 2026, companies received 588.6 billion rubles, factoring in the 33.8 billion rubles they paid to the budget themselves in January and February. Additionally, in May, oil refiners received about 153 billion rubles in tax deductions. The total amount of these two types of support approached 40% of the monthly collected oil MET. This creates another price paradox.
When global oil prices rise, the export alternative for oil products becomes more attractive. To keep gasoline and diesel inside Russia, the budget increases compensations to oil companies. As a result, a portion of the additional revenue from expensive oil is returned to the industry.
When oil prices fall, damper payments may decrease, but MET, EPT, and export revenues drop simultaneously. The budget loses from the other side.
In April, when oil and gas revenues reached approximately 856 billion rubles, they were still 21% lower than the level of April 2025. High price benchmarks were partially neutralized by a strong ruble and budget compensations. In 2026, the budget expects a Urals price of about $59 and an average exchange rate of approximately 92.2 rubles per dollar. However, in March, the exchange rate hovered around 77-78 rubles. With such currency dynamics, dollar revenues yield significantly fewer rubles after conversion.
According to Reuters calculations, in early March, the ruble price of Urals was about 3,582 rubles per barrel against the budget target of 5,440 rubles. To achieve the projected level at an unchanged dollar price, the ruble would have had to weaken to approximately 117.5 per dollar. Thus, Russia may receive more dollars for its oil but fewer rubles to finance its budget.
Three Scenarios: Depletion, Precarious Equilibrium, or Loss of Buyers
Scenario One: Oil Below $50
If Urals remains in the $40–45 range for an extended period, monthly oil and gas revenues could drop to approximately 400 billion rubles - three times lower than the levels required for comfortable budget execution.
At a price of around $35, annual oil and gas revenues risk failing to exceed 5 trillion rubles, against a target of about 8.92 trillion. Concurrently, continued strikes on oil refineries will reduce not only refining but also production, meaning that mineral extraction tax (MET) losses will occur regardless of the price.
In 2025, the federal budget already closed the year with a deficit of 5.6 trillion rubles, or 2.6% of GDP, although the initial plan was around 1.2 trillion, or 0.5% of GDP. Expenditures reached 42.93 trillion rubles, exceeding the plan, while revenues stood at 37.28 trillion. Liquid assets of the National Wealth Fund shrank from 4.23 trillion rubles as of February 1, 2026, to 3.41 trillion as of June 1. On May 1, they stood at 3.63 trillion. With monthly expenditures of 200–300 billion rubles, such a reserve will last for approximately a year or a year and a half. If it becomes necessary to simultaneously finance the deficit, the banking system, infrastructure projects, and support for oil companies, the timeframe will be shorter.
This does not imply an automatic sovereign default. Russia can increase domestic borrowing, raise taxes, cut civilian spending, weaken the ruble, and force banks to purchase government debt. However, each of these solutions shifts the oil crisis onto the population and non-resource businesses.
Scenario Two: Urals Around $59
This range appears to be the most acceptable for Moscow. Within this band, oil and gas revenues could approach the targeted 8.92 trillion rubles, and damper payments would not reach extreme values.
However, the equilibrium remains highly precarious. A $10 change in price can add or remove about 120 billion rubles in revenue monthly - approximately 1.4 trillion rubles a year. The outcome is simultaneously influenced by the ruble exchange rate and the size of the discount.
Such a scenario depends on factors that Russia does not control: decisions by Persian Gulf producers, demand from China and India, US sanctions policy, the situation in the Strait of Hormuz, global economic growth, and the Ukrainian campaign against oil infrastructure.
This is not stability. This is living within a narrow price corridor, where an exit in either direction generates new losses.
Scenario Three: Oil Above $80
At first glance, this is the best option. However, the experience of April showed that a high-priced barrel does not automatically translate into a budget surplus.
With an average monthly Urals price of around $94.87, oil and gas revenues amounted to approximately 856 billion rubles, rather than a theoretical 1.3–1.4 trillion. Part of the windfall was absorbed by a strong ruble, part by compensation mechanisms, and part by the specifics of tax calculations.
Furthermore, when the discount narrows, India and China receive fewer incentives to purchase Russian oil. If Urals approaches the price of Middle Eastern grades while retaining sanctions, insurance, and logistical risks, the buyer switches to an alternative supplier.
Consequently, expensive oil can simultaneously increase the nominal price of exports, reduce sales volumes, strengthen the ruble, and raise payments to oil companies.
The Russian budget receives far from the entire geopolitical windfall of an expensive barrel.
The Primary Blow Has Been Dealt Not to the Oil Fields, but to the Connections Between Them
Russia remains one of the largest producers of oil and gas. Oil and gas condensate production fell relatively moderately: from approximately 524 million tons in 2021 to 516 million tons in 2024. This decline was largely explained by OPEC+ quotas, rather than sanctions alone.
However, the resilience of production masks the destruction of the system that converts hydrocarbons into budget revenues.
Before 2022, the Russian oil and gas model relied on several advantages: proximity to the European market, pipeline infrastructure, international insurance, Western technology, access to cheap capital, multiple export routes, and the ability to sell without heavy discounts.
Over four years, almost every one of these advantages has been weakened or lost.
The European oil market shrank from 175 million tons to less than 25 million. Gas exports to Europe fell from over 150 billion cubic meters to approximately 18 billion. The Nord Stream pipelines are destroyed. Ukrainian transit is stopped. Asian buyers demand a discount. The shadow fleet is becoming a target of physical interdiction. Refineries are in the striking zone. Ports and oil pumping stations are under attack. Western oilfield services technologies are restricted by sanctions.
Particularly dangerous is the dependence of mature fields on continuous technological operations. In certain fields, the water cut of wells exceeds 80–90%. Sustaining production requires hydraulic fracturing, horizontal drilling, complex modeling systems, and imported equipment. Even if Russia is capable of replicating some of these technologies, their cost is rising, quality may decline, and delivery times are lengthening.
The Kremlin's problem is not that oil will suddenly run out. It lies in the gradual rise in the cost of every extracted, refined, transported, and sold barrel, accompanied by a simultaneous contraction in tax yields.
An Oil Power with No Room for Error
The Russian oil and gas industry did not collapse under sanctions. It adapted: it redirected exports, built a shadow fleet, altered settlement methods, expanded the network of intermediaries, and maintained production.
However, adaptation is not equivalent to recovery.
Every new route is longer. Every new intermediary is more expensive. Every Asian buyer bargains harder. Every damaged refinery increases the pressure on ports. Every seized tanker raises the insurance premium. Every strong ruble reduces budget revenues. Every rise in benchmark prices increases the damper. Every fall in benchmark prices reduces the MET.
This is precisely why the decline in the share of oil and gas revenues to 22% does not mean that Russia has escaped its oil dependency. On the contrary, the rest of the economy is now forced to pay more taxes precisely because the oil sector provides the state with less net income.
The most dangerous stage of resource dependency does not occur when a country derives half of its budget from oil. It occurs when oil no longer provides its former revenues, yet the entire state apparatus, military expenditures, tax system, exchange rate, and foreign policy remain built around it.
Russia has arrived at this very line.
The Kremlin still possesses fields, pipelines, ports, companies, and financial reserves. However, it has nearly lost the right to a combination of several adverse factors. Cheap oil, a strong ruble, continued strikes on refineries, tighter control over the shadow fleet, and contracting Asian demand could turn a manageable deficit into a systemic fiscal crisis.
For many years, oil was the insurance policy of the Russian state against its own mistakes. Now, the oil system itself requires insurance - at the expense of the budget, consumers, and future generations.