Russia has emerged as one of the few beneficiary of the escalation of hostilities in the Middle East, as surging energy prices offer Moscow a fiscal reprieve at a time when it struggling for cash to cover the deficit. But Liam Peach, the senior emerging market economist with Capital Economics, cautions that depending on how long, and how bad, the conflict in Iran is the economic boost may prove limited.

“Russia is a clear beneficiary from the conflict in the Middle East,” said Peach in a note on March 5, noting that higher oil and gas prices, alongside the possibility of stronger export volumes to Asia, are likely to narrow the country’s budget deficit. “But unless disruption to global energy supplies is prolonged, this is unlikely to materially alter Russia’s economic outlook.”

Even in a more sustained disruption scenario, he argued that it remains unlikely Europe would resume large-scale purchases of Russian energy. And following Putin’s comments on March 4, Russia is unlikely to be willing to sell Europe more after he threatened to cut Europe off from all further gas deliveries.

The conflict has erupted at a moment when Russia’s economic outlook had been deteriorating. According to Peach, Urals crude fell below $50 per barrel in early January while the discount to Brent widened to $20 per barrel last month. Ship-tracking data also suggested that India had reduced purchases of Russian crude by more than one million barrels per day since November under pressure from the US.

Since the escalation, however, Russia’s benchmark crude price has rebounded sharply. “The benchmark price of Urals has surged to $70 per barrel this week amid supply disruptions in the Middle East,” Peach said, adding that natural gas prices have also risen. With global supplies under strain, major importers are scrambling for alternatives, and “China and India – the two largest buyers of Russian crude – are reportedly looking to step up purchases [of Russian oil and gas]”.

The scale of the windfall depends heavily on the duration of the Operation Epic Fury that started on February 28. If tensions ease quickly, Peach expects only a limited effect. The short-term spike in Asian demand already apparent could be satisfied largely through Russian crude already stored at sea, which are a result of tougher sanctions on the shadow fleet and falling Indian demand. Exports from tapping the seaborn oil would rise only marginally from about 4.5mn barrels per day, below the normal 5-6mbpd. In that case, oil prices would probably retreat and questions about India’s willingness to keep buying discounted Russian crude would reappear.

A longer disruption could deliver a more meaningful boost. “If Brent were pushed to $100 per barrel, the Urals discount could narrow and China and India would look to step up purchases of Russian oil,” Peach suggests. In such circumstances the US might also relax sanctions enforcement, allowing more Russian energy to reach global markets, echoing its approach towards Iran in 2022, when the States turned a blind eye to increased exports to counter the fall in RUssia supplies due to more stringent sanctions.

Even then, Russia’s ability to increase output would be constrained. Peach estimates Russia’s spare production capacity to be limited at roughly 0.5–1.0mn barrels per day, meaning most of the upside would come from higher prices rather than higher export volumes. LNG could also see stronger demand, particularly in Asia if Qatari production remains offline. Europe is a wildcard as it is already in a gas crisis and the halt in Qatari supplies, which account for a fifth of global consumption, cannot be met by US and Russian supplies alone. Europe in particular may be forced to drop its hard line of abandoning and banning Russian gas imports entirely by 2027 and actually increase them again.

The fiscal impact would still be limited unless energy prices rise sharply and remain elevated. “Each $5 per barrel rise in the price of Urals crude raises energy tax revenues by around 0.2% of GDP per year,” Peach said. Given Russia’s fiscal pressures, he expects any windfall to be saved rather than spent, though redirecting revenues towards the war effort could fuel inflation and push interest rates higher.

Attention is also turning to Russia’s fiscal rule and the ruble. The finance ministry has proposed lowering the baseline oil price used in budget calculations to $45–50 per barrel from $59. Under the rule, the central bank adjusts foreign exchange operations through the National Welfare Fund to offset differences between expected and actual oil and gas revenues. Any money earned from oil prices above the threshold is sent to the NWF and not the budget.

“A lower baseline oil price would imply tighter fiscal settings by diverting more revenue to the National Welfare Fund when oil prices are high,” Peach said. But it would also reduce foreign exchange sales by the central bank, removing a key support for the ruble. Current expectations point to the currency weakening to around RUB90 per dollar by the end of the year, from roughly RUB77 today, though sustained oil prices above $100 could offset some of that pressure and would cover the expected budget deficit of 1.7% of GDP in 2025 entirely.

A final uncertainty concerns whether prolonged disruption might reopen European demand for Russian energy. Peach argues that any shift would depend both on EU policy and Moscow’s willingness to supply. “Comments from President Putin this week suggest that energy sales would be limited to ‘reliable partners’,” he noted, although sustained oil prices above $100 per barrel could test that resolve.