Transcription
As the war in Ukraine officially enters its fourth year, things are looking worse and worse for the Russian economy. In the first two years of the war, Russia's economy dramatically outperformed expectations, posting substantial GDP growth, spurred by high military spending and record oil and gas revenues. However, since then, the Kremlin has continuously struggled to tame inflation. Interest rates have soared and GDP growth has stagnated.
In the past few weeks, things have started to look particularly tough for Russia's energy industry. Reportedly, around half of Russia's oil fields have become unprofitable, and a wave of bankruptcies have swept small to medium-sized oil companies. So, in this video, we take a look at Russia's deteriorating energy industry, and what this means for Russia's war machine.
Gone are the days of elite, carefully groomed Kremlin operators working under diplomatic cover. In this issue of Too Long, we explore how Russia's war in Ukraine shattered its traditional spy networks and how Moscow is now turning to teenagers, small-time criminals, and online recruits to wage a quieter war across Europe. That's just one of the 72 pages in the magazine because, as always, there's more to too long than you'd expect. Purchase your copy by clicking the link in the description.
So, to understand why the recent problems in Russia's oil industry might cause somewhat of a headache in the Kremlin, you need to understand quite how reliant Russia's war machine is on oil and gas revenues. The huge increase in military spending that we saw after 2022, which initially spurred growth and helped Moscow buck predictions of an economic collapse, which largely financed through energy revenues, which typically account for around 30 to 35% of Russia's federal budget income.
When Putin launched the full-scale invasion, Brent crude, the benchmark for global oil prices, was trading at roughly $100 per barrel. And in the months that follow, geopolitical turmoil, pushed these prices even higher, reaching a peak by mid-June 2022. This meant that even though Russia was selling off its oil at a discount, the Kremlin was still raking in absurd amounts of money, up to about 1 billion per day. These enormous revenues put the Russian economy in a pretty strong position.
However, towards the end of 2024, things started going downhill. Oil prices were down to more like $70 a barrel, which reduced Russia's foreign currency earnings and forced the Kremlin to pursue a looser fiscal and credit policy to compensate. Ramped up spending meant that inflation, which had fallen to a post-war low of 2.5% in April 2023, started ticking up again, peaking at over 10% in early 2025. To combat this inflation, the central bank hiked its interest rates with its key rate reaching a high of 21% at the end of 2024, which has in turn increased borrowing costs dramatically across the economy. This steep rise in interest rates is probably the main reason that Russia's GDP growth, which looked pretty solid a couple of years ago, has now stagnated with near zero GDP growth forecast for the foreseeable future.
However, even if the domestic economy was looking a little dysfunctional, oil and gas revenues provided the Kremlin with a reliable source of revenue to fund the war. Even though Western sanctions have made it harder for Russia to export its oil and gas to its main European customer base, it managed to successfully find new buyers and shift exports to Asia, especially India and China. Unfortunately for the Kremlin, in the past year or so, its energy revenues took a hit as well. Revenues from the sector stood at 93 billion euros in 2025, downgraded from an original forecast of 120 billion.
That Russia is getting less and less money from flogging fossil fuels is not in itself surprising. A strong ruble, which skyrocketed 45% against the US dollar last year means that Moscow is getting less of its own currency for each dollar it earns from exports. And a global glut of crude has pushed global oil prices down. The most recent sanctions also seem to be playing a role here. After the US imposed sanctions on Russia's top producers, Roseneft and Look Oil in October, for instance, the discount on Russian oil versus the Brent benchmark widened to about $27 a barrel, more than double what it was at the start of 2025.
Demand has also been hit by an EU ban on imports of fuels refined from Russian crude that came into force last month, and the fact that India agreed to curb purchases as part of its recent trade deal with the US. For context, last year India was the largest buyer of Seabor Russian oil, buying about 1.7 million barrels per day of Russian crude, roughly half of Russia's total seaborn exports. This January, however, imports fell to about 1.1 million barrels per day, even though Russia sharply increased its discount with cargos apparently priced as low as $25 a barrel and are expected to continue declining throughout the year. While China might be able to pick up some of the slack, its stock piles are already very full by historical standards. And Beijing might be wary of accepting too much Russian crude given that Russia accounted for about 1/5 if of China's total crude imports last year. And Beijing has always historically avoided over reliance on any single supplier.
Anyway, with export revenues falling and borrowing costs still super high, Russia's domestic oil producers have been hit hard. According to Rostat, half of the country's oil and gas producing companies are currently unprofitable. Between January and November, they collectively lost 575 billion rubles. Those companies that remain profitable have seen their profits more than half to 3 trillion rubles over the past 11 months. Towards the end of 2025, two oil companies filed for bankruptcy and another was declared bankrupt. According to the central bank, banks have been forced to restructure 2.7 trillion rubles of loans for the industry and the oil and gas sector now accounts for plurality of restructurings.
As a result of all of this, drilling has slowed marketkedly. According to industry data, in 2025, production drilling fell to its lowest rate since the pandemic. Furthermore, in January 2026, Russia's crude output averaged 9.2 2 million barrels a day, over 300,000 barrels below the nation's OPEC quotota and the first time that it's been below its quotota line in recent years.
This has also been bad news for Russia's public finances. Their budget deficit widened to 2.6% in 2025. Pretty big for a country struggling with 6% inflation and no access to international credit markets. And it's expected to widen further in the coming years. The Kremlin has even had to tap into the National Wealth Fund. its rainy day reserve comprising of a mix of foreign currencies and liquid assets like gold. But according to a report by Gasprom Bank's Center for Economic Forecasting, the fund could be exhausted within 15 months if the current oil prices persist.
Nonetheless, despite all of this, Putin looks unlikely to change course anytime soon. This might be in part because he's hoping for a rise in global oil prices. And well, if Trump attacks Iran, that is very possible. But it's probably more that Putin is gambling that the West will run out of political will before Russia runs out of cash.
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