Russia’s wartime economy may struggle to maintain necessary oil revenue if Saudi Arabia significantly lowers global crude prices. 

Reports suggest the kingdom has indicated that crude prices could fall to as low as $50 per barrel if the Organization of Petroleum Exporting Countries fails to agree on cutting oil production.

Analysts argue that Riyadh is implying that it may oversupply the market with oil. The action would lower prices and penalise all OPEC members, including Russia, who have not assisted in cutting back on oil flows.

Luke Cooper, a research fellow at the London School of Economics, wrote for the IPS Journal, “With Russia already selling its oil at discounted rates and with higher production costs, a low-price environment in oil markets may impact its ability to finance its aggression in Ukraine.” 

By pressuring member nations to reduce production, Saudi Arabia, the organisation’s de facto leader, has been attempting to maintain oil prices over $100 per barrel.

However, this hasn’t helped with the international crude price, which is still below $80. According to Financial Times sources, Riyadh has changed its approach and will now turn on its taps by December.

“Saudi Arabia is fed up,” Simon Henderson, director of the Bernstein Program on Gulf and Energy Policy at The Washington Institute, told Business Insider. “Leadership of OPEC is a multifaceted responsibility. It can work well, but it’s also like herding cats — pretty damn impossible, at least some of the time.”

According to data from S&P Global Ratings, Russia is one of OPEC’s overproducers. Based on the most recent data available, Moscow produced 122,000 barrels more in July than its daily allowance. Additionally, Kazakhstan and Iran went above predetermined boundaries.

Given that its three-year conflict in Ukraine has resulted in a massive increase in defence and security spending, Moscow is under pressure to extract as much revenue as possible from the conflict. In Russia, the combined spending of these industries will represent 40% of all federal spending in the upcoming year.

In contrast, oil income plays a major role in Russia’s budget. According to the country’s finance minister, a few years ago, 35%–40% of the country’s budget revenue came from the production of gas and oil.

Using unregistered “shadow” tankers, Russia has been able to get around these limitations, but it may be more difficult to overcome Riyadh’s threat of $50 per barrel.

If Saudi Arabia’s production glut rekindles the oil price war between Russia and the kingdom, then things can get ugly. 

Disagreements over production cuts that year led both countries to unleash supplies, seeing who could withstand this low-cost climate longer.

Foreign exchange reserves become crucial in these circumstances, which presents challenges for Russia.

The country’s protection against low oil prices has evaporated since the invasion of Ukraine. Since the beginning of the year, Russia’s National Wealth Fund has been almost halved, and it is unable to get Western currencies to diversify its foreign exchange holdings.

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