Russia gets a windfall from Iran war but boost could be short-lived

Russia has found itself in the curious position of benefiting from the turmoil hitting its Middle East partner and ally, Iran.

Tehran’s almost total closure of the Strait of Hormuz has caused global oil and gas prices to surge, filling the coffers of major oil and gas producers like Russia.

Sergey Vakulenko, senior fellow at the Carnegie Russia Eurasia Center, told CNBC Tuesday that Russia’s windfall from the Iran war resulting energy price growht ran into the billions of dollars.

“So far the oil price, and the Urals in particular, has jumped by more than $60 a barrel and this brings the Russian state almost $9 billion per month, that’s quite substantial,” he told CNBC’s “Squawk Box Europe.”

“Even the countries that were considering less oil from Russia, like India, are buying more again and the United States is even issuing dispensations for that,” he noted, referring to a 30-day waiver issued by the White House earlier in March enabling countries to buy sanctioned Russian oil and petroleum products stranded at sea, in an effort to tame global energy price hikes.

The price of a barrel of Russian Urals crude oil currently stands at $115 Tuesday. On February 27, the day before the U.S. and Israel launched their bombardment of Iran, the price per barrel was $57. Russian exports of helium, aluminum and nitrogen fertilizer have also given state revenues a boost, but “at an order of magnitude smaller” than oil, he noted.

While the Russian state budget had its own problems, Vakulenko noted, with the deficit amounting to around $35 billion in the first two months of the year, the boost from the Iran war had been “palpable,” nonetheless.

The windfall was helping Russian President Vladimir Putin to postpone planned cuts to state spending in various sectors of the economy that would have proved unpopular, Vakulenko said.

“What he was spending on the war meant he was basically pawning the country. Now, he doesn’t have to do that anymore,” the analyst said.

The longevity of this windfall for Moscow will depend on the duration of the conflict, but the turmoil in the Middle East not only alleviates some fiscal pressures but also serves as a distraction from problems that have dogged Russia’s economy since it invaded Ukraine in 2022.

Inflation, currently at 5.9%, remains a thorn in the side of the Russian central bank, with interest rates having to be kept stubbornly high, at 15%. Russia’s central bank is struggling to tame price rises caused by the Kremlin’s massive military spending and an economy that has pivoted toward serving the country’s war machine, as well as rising food prices, labor shortages and sanctions.

Gen. (Ret.) Richard Shirreff, former NATO Deputy Supreme Allied Commander Europe, told CNBC Tuesday that the short-term benefit Russia was seeing from the Iran war belied the beleaguered state it was in.

“This is an economy that’s in the death zone — it’s in exactly the same position as a climber over 8,000 feet — the body begins to eat itself, it’s facing existential long-term damage — but he [Putin] is gaining economically [right now],” Shireff told CNBC’s “Squawk Box Europe.”

Ukraine is, understandably, concerned about the extent to which the Iran war is benefiting its nemesis Russia — not only on the economic front, but also from a geopolitical perspective. Ukrainian President Volodymyr Zelenskyy claimed this week that some of the country’s partners had called on Kyiv to scale down strikes on Russia’s oil sector because of the global oil price surge.

The Iran war is proving to be a significant distraction from its own conflict and is diverting military resources it might have received from the U.S. towards Iran.

“The Americans fired off something like four times as many Patriot missiles in the first four days of war as they’ve supplied Ukraine in four years,” Shireff, the co-founder and managing partner of Strategia Worldwide, added.

“So, Putin is gaining because there will be less kit to provide to the Ukrainians,” he said.