The outbreak of full-scale conflict between Israel and Iran caused oil prices to jump that will provide the Kremlin with a welcome fresh infusion of cash at a time when military spending continues to rise, ballooning expectations for this year’s budget deficit.

Brent crude prices climbed to $78 per barrel at the end of last week—up nearly 25% from early June levels—before retreating to the low $70s as the initial shock of Israel’s attack on June 13 wore off. Risk premia are up, but so far Iran’s export of oil has not been affected.

“The full-scale war between Israel and Iran has become a test for the oil market, which seemed accustomed to everything during the year and a half of escalation,” The Bell’s Denis Kasyanchuk said in a note on June 17.

Before the conflict escalated, Brent prices had slumped from a January peak of $83 to as low as $58, under pressure from higher OPEC+ output quotas and mounting global Trump-tariff trade tensions that hurt Russia. As oil revenues dropped by a third, the Ministry of Finance (MinFin) had to triple the budget deficit forecast to a still relatively modest 1.7% of GDP, or RUB3.8 trillion ($43.1bn). At the same time Russia’s economy contracted in the first quarter of this year in real terms although still put in a nominal 1.4% of growth, after two years of 4.3% annual growth.

In mid-May, as markets began pricing in a possible Israeli strike on Iran, oil began to rebound, stabilising around $65 per barrel. The price surge following Israel’s missile strikes has since moderated but remains elevated compared with pre-conflict levels.

Budget deficit increased due to volatile oil prices

In May 2025, Russia recorded a federal budget deficit of RUB506bn ($5.76bn), according to MinFin. The monthly shortfall reflected a sharp y/y decline in oil and gas revenues, down by a third compared to May 2024, due to weaker oil prices and discounted export volumes. Oil and gas revenues were approximately RUB508bn, down from around RUB780bn in May 2024; non-oil and gas revenues continued to grow modestly, but not enough to offset the shortfall; and total federal expenditures increased significantly due to higher defence and social spending. (chart)

Russia’s federal budget showed a sharp deterioration over the first five months of 2025, shifting from early surpluses to deepening monthly deficits as oil prices weakened and expenditures rose.

According to official data from the Ministry of Finance, Russia posted a budget surplus of RUB282bn ($3.2bn) in January, followed by another surplus of RUB230bn ($2.6bn) in March. These gains were driven by seasonally strong oil and gas revenues—boosted by an average Urals crude price near $59 per barrel—as well as early-year tax receipts.

However, the situation reversed sharply from February onwards. A deficit of RUB521bn ($5.9bn) in February was followed by further shortfalls of RUB304bn ($3.5bn) in April and RUB506bn ($5.8bn) in May. The cumulative budget balance for January–May stood at approximately –RUB819bn ($9.3bn).

The weakening trend was largely due to falling oil revenues. The average price of Urals crude dropped steadily from March through May, reaching $52.08 per barrel in May, well below the Ministry’s earlier forecast of $69.7. At the same time, expenditure growth remained strong, particularly in defence and classified spending categories. In the first five months, total federal spending rose by 20.7%, while revenues increased by only 3%.

The mounting monthly deficits prompted the government to revise its full-year budget outlook. In June, the State Duma approved a revised forecast, increasing the projected federal budget deficit for 2025 from RUB1.17tn (0.5% of GDP) to RUB3.79tn ($43.1bn, or 1.7% of GDP).

 

Outlook for deficit improves thanks to the war

The spike in prices looks good for Russia but the budget, which remains heavily dependent on oil and gas revenues, only stands to benefit if high prices are sustained over a longer period of time.

“Short-term jumps, which always occur during major aggravations, but usually pass quickly, are not of great importance,” The Bell noted. “Prices must be fixed at a new level for a long time” to make a significant difference to the Kremlin’s revenues. That scenario remains a possibility if Iran’s oil exports are disrupted, or regional shipping lanes are threatened.

“If Israel damages or stops Iranian oil exports, Tehran could retaliate by hitting shipping and production in the Persian Gulf,” Clayton Siegle, a senior fellow at the Center for Strategic and International Studies told The Bell, prior to the outbreak of hostilities. Such disruption could imperil up to 20mn barrels per day passing through the Strait of Hormuz, which Iran could shut down in a week if it mines the channel.

Analysts remain divided on the likelihood of escalation. Goldman Sachs projects that closure of the strait—though unlikely—could drive Brent above $100 per barrel. JP Morgan’s estimate is more aggressive, suggesting a spike to $120–130, which would be an enormous boon for the budget.

Roughly speaking, for every $10 increase in the price of oil, the Russian federal budget earns around an additional RUB1.35tn to RUB1.8tn ($15bn to $20bn) annually, depending on production levels, export volumes, and the exchange rate. Currently the breakeven oil price for the budget is estimated to be $80-$85 per barrel, so the recent surge in oil prices is still not enough to balance the budget, but it does go a long way, if the prices are sustained, to reducing the deficit back towards the previous goal of 0.8% of GDP for this year.

Triggers for higher prices

So far, shipping activity remains unaffected by Israel’s attacks and its export-orientated oil production facilities have remained untouched. Lloyd’s List Intelligence data show tanker loadings in the Persian Gulf have continued despite the conflict and Israel has not struck the small island of Kharg, located 25km from the coast of Iran, where the country's largest oil terminal is located.

A more probable trigger for sustained high prices would be a direct hit to Iran’s export oil infrastructure. While Israeli strikes have thus far avoided Kharg, Goldman Sachs says that Iranian production could fall by 1.75mn barrels per day – nearly half the country’s output – if the island is bombed.

“OPEC+ members will most likely be able to replace most of the lost supply (0.9mn bpd). In this scenario, the Brent price will peak just above $90 per barrel, but then fall to $60 in 2026 as supplies from Iran are restored,” The Bell said.

For Russia, even a temporary boost in prices will offer partial relief to the budget. From January to May 2025, oil and gas revenues fell RUB4.2 trillion, or 14.4% y/y, while May’s drop alone reached 35%.

“Total budget revenues still remain in the black by 3%, thanks to non-oil and gas items growing on the continuing inertia of the previous overheating of the economy. But this will soon change - the economy is cooling, and revenues from VAT and income tax will not be able to provide such growth,” The Bell said.

MinFin remains cautious 

In the spring, the Finance Ministry even tried to push through a decision to reduce the oil cutoff price in the budget rule to $50 per barrel, which would have allowed budget expenditures to be limited in the context of low oil prices and slowing economic growth. But economic expediency seemed to have given way to political considerations — the cutoff price was left at the same level, while budget expenditures (especially on classified items, which are mostly related to defence) continued to grow rapidly. In just five months, budget expenditures grew by 20.7%, while revenues were up by only 3%.

The Ministry of Finance, facing a growing budget deficit, revised its Urals oil price assumption (which trades with a $10-12 discount to Brent) from $69.7 to $56 per barrel, reducing expected oil and gas revenue by 24%. In March, a barrel of Urals cost an average of $59, in April - $54.8, in May - $52.08. That new forecast prices will reduce the budget's projected oil and gas revenues by or by RUB2.6 trillion to RUB8.32 trillion (3.7% of GDP).

But even this fall is not fatal for the Russian government as it still has ample buffers. The liquid portion of the National Welfare Fund has fallen after MinFin tapped the fund to cover a growing shortfall, but it still contains RUB3.3tn ($37.5bn), and RUB1.3–1.4tn ($14.8–$16bn) in additional oil and gas revenues from 2024 are expected to be added this summer – more than enough to cover even the higher projected deficit.

And there are more options in reserves. In an emergency the government can sell some of the fund's illiquid assets, including a controlling stake in Sberbank, or hike taxes, which remain amongst the lowest in Europe. In addition, there is some RUB20 trillion of liquidity in the banking sector that can be tapped by increasing the volume of Russian Finance Ministry’s OFZ treasury bills issues, currently running at about RUB4.5 trillion a year.

Despite the recent spike in prices, the working assumption remains that oil prices will drift down again as the fundamental oversupply of oil supplies in the face of falling demand as a result of a cooling of the global economy remains unchanged

“If the situation does not change and there is no escalation of hostilities, prices will most likely tend to the previous level,” The Bell concluded.