· 4 min read
In an earlier blog last year I described how fossil fuel revenues fuelled warfare in Ukraine and the Middle-East, despite the sanctions on Russia and Iran. Although the EU continues to discuss more stringent sanctions on Russia, there is a more silent, and perhaps more effective, force at work that may well undermine the engine of warfare: the trend of declining prices of oil and natural gas. Let’s dive a bit deeper into this trend.
Downward trend of oil and gas prices
Oil prices have certainly declined in the last couple of months, driven by a combination of strong supply growth in non-OPEC+ countries, the unwinding of OPEC+ supply cuts and rising trade war fears, compounding an already weak demand growth outlook. The bearish outlook for demand is caused by unprecedented economic uncertainty, with the rising penetration of electric vehicles also denting demand. The IMF expects supply growth to likely outpace tepid global demand growth through 2025 and 2026. This seems in line with the last IEA monthly oil report. Futures markets indicate oil prices may therefore further decline. This puts significant downward pressure on the government revenues of Russian oil, which is mainly exported to China and India at a sizeable discount of $5-15 to Brent oil, according to the IMF estimates. The latest estimates already show Russia’s monthly fossil fuel export revenues dropping by 6% (month-on-month) to a level of EUR 585m per day, despite marginally increasing export volumes. There are signs that Russia is worried about the impact of further drops in oil prices, as the central bank has identified this as a ‘key risk’. Similar concerns are already raising alarm bells among shale oil producers in the US and pushing large oil producing countries like Saudi Arabia to review spending plans.
What about natural gas prices? The IMF signals that they have reversed course after a period of gains and started a decline alongside oil prices. This new trend seems to be caused by weak demand from China, escalating trade tensions and concerns about future demand growth. Although the IEA signals that the gas supply side remains rather tight, the demand uncertainty may well improve the global gas balance. Futures markets seem to indicate significantly declining natural gas prices in the next few years, both for TTF prices and Henry Hub prices.
Since the fossil fuel industry is such an important part of the Russian economy, it should therefore not come as a surprise that the latest IMF Economic Outlook projects GDP growth in Russia to drop from 3.7% in 2024 to less than 1% in 2025 and 2026.
Eroding oil & gas revenues incentive for peace?
Until recently, the Russian economy has demonstrated remarkable resilience and managed to finance its warfare through its oil and gas revenues. At the same time, it should be acknowledged that the government was also obliged to draw down on its substantial reserves, built up by prudent macroeconomic policy in the past, as described in my earlier blog. According to some estimates, the liquid portion of Russia’s sovereign wealth fund has fallen by two-thirds since 2020. In other words, the situation now seems to be changing dramatically. The unprecedented economic policy uncertainty has hit global economic growth prospects severely and has begun to weigh down on the outlook for oil and gas prices. This is starting to significantly erode the oil and gas revenues of oil and gas producing countries in general, and Russia in particular. In addition, there is the chance that the EU sanctions on Russian oil and gas may further tighten, e.g. by lowering the oil price cap, putting further downward pressure on the engine financing warfare in Ukraine. Perhaps there is now some reason for hope that the silent factor of shrinking oil and gas revenues may indeed increase the incentive for Russia to seriously engage in peace talks. After all, the oil and gas revenues are very much required to finance the improvement of public services and economic diversification.
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Sources:
1. Noé van Hulst, ‘Electrons for peace’, Illuminem, Nov 14 2024
2. ‘EU ready to mirror US 500 percent tariff plan on Russia, says von der Leyen’, Politico, Jun 3, 2025
3. IMF, World Economic Outlook, April 2025, p. 35
4. IEA, Oil Market Report – May 2025
5. https://energyandcleanair.org/april-2025-monthly-analysis-of-russian-fossil-fuel-exports-and-sanctions/
6. Bank of Russia, Financial Stability Review No. 1 (26), 2024 Q4- 2025 Q1, 2025, Summary, p. 3 https://www.cbr.ru/Collection/Collection/File/55908/4q_2024_1q_2025.PDF
7. ‘Oil chiefs warn of end to shale boom as prices fall and OPEC boosts output’, Financial Times, 26 May 2025, frontpage; ‘Saudis to ‘take stock’ after oil price drop’, Financial Times, 30 May 2025, p. 4
8. IEA, Gas Market Report, Q1-2025
9. IMF, World Economic Outlook, April 2025, chapter 1, p. 13
10. ‘Putin’s war chest shrinks as oil prices slide’, Financial Times,, 14 April 2025, p. 2
11. OECD, Economic Outlook, 3 June 2025
