Vladimir Putin did two things last week, indicating that despite a potentially huge rise in Russia’s oil income resulting from the war in Iran, he is deeply worried about the country’s economic predicament.
In publicly released comments on March 26 to the Russian Union of Industrialists and Entrepreneurs — a gathering of the country’s most powerful tycoons — he warned against undue optimism over the economic windfall from the war in the Middle East.
“If the market swings one way today, tomorrow it could swing the other way,” he said. He wanted the message to be widely heard — the full contents of such meetings are typically not disclosed; since the invasion of Ukraine began, even the list of attendees has been classified.
Second, and behind closed doors, Putin did something more notable. Even as he promised to take all of Ukraine’s Donbas region, as The Bell reported, he invited the assembled gathering of wealthy businessmen to chip in with what were termed voluntary contributions to the war effort.
According to one participant, the idea of shaking down business “in a difficult time for the country” originated with Rosneft chief Igor Sechin, who had laid it out in a letter to Putin the day before. The letter proposed the issuance of war bonds as the fundraising mechanism. Since Sechin is not a major shareholder in the company he runs, he will be spared the dubious honor of contributing his own money.
Others, though, were anxious to demonstrate their obeisance to the leader and responded on the spot. Suleiman Kerimov reportedly promised 100bn rubles ($1.1bn); the sanctioned businessman Oleg Deripaska also agreed to contribute when asked.
They had little choice. It is inconceivable that Russia’s major billionaires would refuse, and that’s closely linked to why these men should no longer be called oligarchs. Two or three decades ago, they could impose their will on the state, manipulate the legislature, and bend or subvert the law: they were oligarchs in the true sense of the word.
But since the financial crisis of 2008–09, and with increasing speed after Putin’s return to the presidency in 2012, they bend to the Kremlin’s will rather than shape it. The invasion of Ukraine marked a new stage in this subordination. Putin has offered his tycoons state support in weathering Western sanctions in exchange for complete loyalty and public backing of the war. Squeezed between those sanctions and the threat of domestic reprisals, the billionaires fell into line. They are creatures of the Kremlin now, not a power unto themselves.
Putin’s demand might seem odd given the financial windfall the war in Iran has delivered; estimates suggest this could amount to $2.8bn monthly if prices stay high. Add in gas and fertilizer revenues, and it’s clear the budget is benefiting.
But there is no contradiction. The Kremlin’s standing position is that commodity windfalls are temporary, while the costs of war are structural and open-ended. So the state reaches for both simultaneously — and presses the rich to finance some of the war effort to remove it from the government’s books.
Four weeks of war in the Middle East, and the oil price surge it has triggered, have given the Russian authorities room to breathe — for now. Both the Kremlin and the Finance Ministry know the situation remains volatile. The immediate improvement in revenues has allowed Moscow to abandon plans to tighten the budget rule, which would have redirected a larger share of oil income into reserves rather than spending. The Finance Ministry has not, however, abandoned a separate round of planned budget cuts.
Because annual revenue increases will depend on how long prices stay elevated, and nobody can predict that with confidence. There are some grounds for the regime to feel positive; even the most optimistic oil analysts argue that were the war to end tomorrow, supply disruptions would persist for at least four months, given the need to repair infrastructure, restart facilities, and clear backlogs in tanker traffic. On that basis, the average oil price for this year is unlikely to fall below $80 a barrel even in the rosiest scenarios.
Given this uncertainty, the Finance Ministry has decided to suspend its budget rule entirely until the summer. That means all oil and gas revenues will flow directly to the budget, regardless of the price level, rather than being diverted to the National Wealth Fund. The ministry is pursuing two objectives: ensuring the deficit is brought under control while conditions allow, and avoiding strain on currency markets. Had the rule remained in force, the ministry would have been obliged to purchase exporters’ foreign currency earnings before those companies could pocket the bulk of their windfall.
Oil revenues are not the only source the state is turning to. Whether the government will follow through on its earlier spending cuts remains unclear: with oil prices high, the immediate fiscal pressure has eased, and cutting budgets in a boom is politically awkward. Spending has, in any case, been inflated by four years of wartime fiscal stimulus. At his meeting with business leaders, Putin himself warned against using the oil bonus to pay out dividends or ramp up state expenditure. The logic is plain: if elevated prices are temporary, windfall profits cannot simply be spent.
And if they cannot be spent, but the war still needs funding, other sources must be found. That is where the “voluntary contributions” come in. The surge in profits flowing to fertilizer, grain, and aluminum businesses will tempt the state to force owners to share their gains, just as it did in 2022.
The war in Iran has given Russia’s budget breathing space, but it has not resolved the underlying problems. The very fact that even with oil at $100 a barrel, Putin is passing around the collection tin tells you that the gap between structural expenditures and revenues has not closed.
Other risks loom too. If prices stay too high for too long, they could — as in 2008 and 2014 — this will trigger a global demand slump. Combined with rising supply, that would push prices sharply lower, potentially very fast. For now, the regime is making the most of the moment — and making sure business pays its share.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
More on this and other aspects of the Russian economy in a weekly summary produced by the independent publication, The Bell.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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