If the history of disastrous wars in recent centuries tells us anything, it’s that a small detail can turn a conflict around. It happened during the rain that delayed Napoleon’s attack at Waterloo, or during the Battle of Midway in World War II, when decryption of the Japanese code allowed the United States to prepare an ambush. The arrival of a new actor in the war in Ukraine could change everything, and all eyes are now on Russia.

News. There appears to be no connection between the war in Ukraine and Saudi Arabia and the decision to abandon the target of keeping the price of crude oil at $100 per barrel and potentially leave the price at $50 as it prepares to increase production from December. This change in strategy reflects the kingdom’s desire to stop losing market share to other manufacturers.

However, if the action takes place, the first victim will be the Russian economy, but it goes much further. Moscow relies on oil revenues to finance its war in Ukraine, and the defense sector accounts for 40% of federal spending. In fact, Russia is already selling its crude oil at discounted prices and has exceeded its production quotas, which is exactly what creates tension with Saudi Arabia.

There is no doubt that if a price war were to occur, Russia would be at a serious disadvantage; because its oil is more expensive to extract and foreign exchange reserves have decreased after Western sanctions; All this compared to the Saudi mechanism.

In history: conflict in OPEC+. Saudi Arabia was known to impose production cuts to keep crude oil above $100 per barrel, but with current prices around $80, this no longer made sense for Saudi Arabia.

Russia, on the other hand, produced 122,000 barrels per day more than agreed in OPEC+, causing friction with other members. Moscow’s position was quite clear: maximize revenue to sustain the rising cost of the war, which further increased tensions with Saudi Arabia.

Dependency on Russia. This is no secret, but it is why Russia’s situation is so precarious. Oil has been instrumental in financing the attack since it invaded Ukraine in 2022. Despite the sanctions imposed by the West, Moscow kept its economy afloat by selling oil to countries such as China.

But analysts say low oil prices could jeopardize Russia’s ability to keep its war machine afloat, as it needs higher prices to cover higher production costs. Let’s assume that oil and natural gas represent 35-40 percent of budget revenues. With the National Wealth Fund halved this year, Russia’s reserves are no longer enough to compensate for the significant drop in crude oil prices.

If Saudi Arabia increases its production and starts a price war as in 2020, Russia will be in serious trouble.

Inflated growth. Russia’s economic growth, reaching 3.6 percent in 2023 and 5.4 percent in the first quarter of 2024, may be misleading. According to economist Stefan Hedlund, this growth is due to the increase in military spending, which causes a deterioration in economic indicators.

Most of this comes from financing soldiers and military equipment, which is not sustainable in the long term. Therefore, if the oil price drops sharply, Russia may face a serious economic crisis.

Prediction in the battle key. There are already experts warning that if the worst-case scenario for Moscow comes true, Russia may need to end the war in Ukraine by 2025 to avoid economic collapse. The combination of the decline in oil prices, increased domestic arms demand, and budget deficit constraints has left the country in a precarious financial situation.

If oil prices fall significantly, Russia may no longer be able to sustain the conflict. In this scenario, there may be a plan B in which Russia steps up its military operations in Ukraine in order to achieve quick successes on the battlefield before the decline in oil prices seriously affects its ability to finance the war.

In the long run, of course, this could further increase tensions between Russia and Saudi Arabia within OPEC+.

Perspectives. Russian Deputy Prime Minister Alexander Novak suggested that there is uncertainty about whether OPEC should increase production at its next meeting in December, and that this could be a harbinger of a showdown with Saudi Arabia. Although foreign exchange reserves and fiscal maneuvering may provide Russia with temporary relief, a price war with Saudi Arabia could have devastating consequences on the economy and war effort in Ukraine.

Time and the coming months will give us a better perspective on the “fate” of the barrel price and therefore the war in Ukraine.

Image | Martin Prochnik, Houses of the Oireachtas

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