The sanctions imposed by Donald Trump on Vladimir Putin for his refusal to make concessions in the war against Ukraine have pushed the price of Russian oil down to its lowest level since March 2023. The cost of Urals crude ranged between $36.6 and $38.4 per barrel last week, according to the Argus agency, implying discounts at its ports of up to $23 compared to the Brent benchmark. While this is not a crushing blow that will end the invasion of Ukraine, the new U.S. sanctions are straining a budget in which the Kremlin has allocated 38% of spending to strengthen its war machinery and bolster its repressive forces in the coming years.

The U.S. Treasury Department has set November 21 as the deadline to suspend purchases of crude from Rosneft and Lukoil, two Russian oil giants that sell half of the country’s exported oil abroad.

Lukoil, more exposed to the international market than Rosneft, which focuses on the domestic market, risks being broken up. According to Russian media, bidders for its assets include ExxonMobil, Carlyle, and oil-producing states such as the United Arab Emirates.

Although the new sanctions have not yet come into effect, the market has begun to anticipate their consequences. An Argus report accessed by Russian media indicates that the discount Russian oil companies offer clients for secret purchases via the “shadow fleet” departing from their ports has risen from $12 at the end of October to between $17 and $19 per barrel in the first half of November. For direct shipments to India, where the crude is refined and sold to the West, the discount increased from $2.20 to $3.79, while for China it decreased from $1.88 to $0.68 per barrel.

However, major Chinese state companies have practically halted all purchases of Russian crude due to the threat of Western sanctions, analysts from Rystad Energy told Bloomberg.

Trump’s decision has reversed the fading impact of the $60 cap on Russian oil prices that the West imposed in December 2022. That measure initially forced Russia to apply a discount of up to $30 per barrel, but crafty sanction evasion eroded its effect to less than $5.

“President Trump is the peace-and-prosperity president,” the U.S. Treasury Department said on X, the social network owned by Elon Musk, “and Treasury is prepared to take further action if necessary to end the senseless killing.”

Russia produces around 9.3 million barrels of oil daily, nearly its full capacity, according to the International Energy Agency (IEA). In a report published on November 13, the IEA stated that “so far Russian exports have continued largely unabated, even as volumes have piled up on water as buyers evaluate compliance risks and possible workarounds.”

Crude is circulating around the world as Russian buyers wait to see whether Trump’s sanctions are a bluff or serious. According to Bloomberg, the volume of crude loaded onto tankers at sea has increased by 16%, reaching 175 million tons since August. Many ships with unknown final destinations are heading to the Suez Canal from ports in the Baltic Sea, Black Sea, and Arctic.

In addition to the U.S. sanctions, Ukraine has launched a campaign targeting Russian refineries. Rosneft’s largest plant, located in the Ryazan region, about 200 kilometers (124 miles) southeast of Moscow, has suspended operations for the second time in a month due to drone attacks, according to sources from The Moscow Times. This facility, which accounts for 5% of Russia’s total refining capacity, brings the total number of plants temporarily closed in November to five.

Although there have been some fuel shortages in certain Russian regions, the impact of Ukrainian strikes has not put Russian production at serious risk. U.S. agency Reuters estimates that Russian refineries have only reduced production by about 3% this year due to the attacks. This is explained by the fact that the Russian refining industry has a total capacity of up to 6.6 million barrels per day, far higher than what it currently uses.

Less money for weapons

The Kremlin is trying to balance increasingly tight accounts after having already spent the funds Russia had built up over the years, including a cushion of foreign currency saved from European countries competing to fill their gas reserves.

The State Duma, the lower house of the Russian parliament, is about to finalize next year’s budget. The Russian government expects to increase revenues to 40.2 trillion rubles (about $438 billion) by implementing a sharp tax hike, from which it hopes to collect an additional $33 billion. Meanwhile, expenditures are projected to rise to 44 trillion rubles (around $480 billion), roughly $15 billion more than last year.

The target is a deficit of 1.6% of GDP, down from the 2.6% projected this year — a fairly large deviation by Russian standards, though smaller than in the West. Nonetheless, it remains one of the Kremlin’s major concerns, especially since the economy is being driven by war rather than consumption, and hydrocarbon revenues, at 7.5 trillion rubles ($92.8 billion), have collapsed 21% compared to 2024.

The Kremlin plans to allocate approximately 30% of the budget to the armed forces, which equates to about $150 billion. However, Russia’s military spending is more cost-effective than Europe’s, since recruitment and weapons production are relatively inexpensive in Russia.

Moreover, this increase in military spending is expected to continue in the coming years. The Russian government plans to allocate 39.5 trillion rubles (around $420 billion) to its armed forces by 2028.

Apart from the war, the Russian government will allocate another 8% of the budgeted expenses, about 3.9 trillion rubles (roughly $43 billion), to security forces that the Kremlin uses to keep both the population and its own internal factions in check.

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