Putin’s war economy can’t escape Trump’s trade blitz

The industry is both the engine of the Kremlin’s economy and its primary source of vulnerability; oil and gas make up around a third of state-budget revenues.

Global crude prices slumped this month and remain volatile after tariff-fueled recession fears gripped the market. Russia’s benchmark Urals blend is hovering under $55 a barrel, far below the target in this year’s budget of around $70. Analysts say that if prices remain low, the Russian economy will face a hard landing, in which case they project the budget deficit would nearly double this year.

The downturn comes at a precarious moment for Moscow: Its economy was already slowing before the collapse in the price of oil, and the Kremlin is engaged in negotiations with the U.S. over a cease-fire in Ukraine. Moscow has been slow-walking the peace talks, calculating that battlefield gains give it more leverage for maximum concessions in those discussions.

While current oil prices aren’t likely to push Russian President Vladimir Putin to abandon his military campaign, a deeper fall could alter his calculus. Meanwhile, the oil squeeze will leave the Kremlin with painful choices, analysts say.

“If the oil price stays down, they will feel the pinch, and they are already beginning to feel the pinch," said Elina Ribakova, a nonresident senior fellow at the Washington-based Peterson Institute for International Economics. “If this continues, they will face a guns versus butter situation."

Analysts at J.P. Morgan wrote in a note to clients this week that despite Moscow becoming more insulated from global trends because of sanctions and severed international ties, “the tsunami generated by U.S. trade policy is unlikely to leave Russia unscathed."

Putin’s national-security state is in many ways built on oil wealth. A catastrophic fall in the oil price in the 1980s contributed to the dissolution of the Soviet Union. A recovery in 1999, when Putin was named Russian prime minister, aided his rise to power. For that reason, the government regards a fall in oil prices as a national-security threat.

Oil’s central place in the Russian economy extends beyond the state coffers. In what economists call a multiplier effect, a booming energy industry cascades to adjacent sectors: steel for the pipes used by oil drillers, for instance, or construction for the infrastructure around refineries. A contraction would have knock-on impacts across whole communities that are organized around and supported by the extraction and refining of crude.

Sergey Vakulenko, a former Russian energy executive and senior fellow at the Carnegie Russia Eurasia Center, estimates that Russia loses about $25 billion a year for every $10 drop in the oil price.

“So this does affect revenues, and the economy as a whole is deprived of money," he said.

Still, analysts say that oil prices would need to stay lower for a prolonged period to have an effect on Moscow’s war plans. Moscow sources heavy munitions from North Korea and produces its own steel for tanks and machinery. China has shored up Moscow economically throughout the war.

Soon after Trump took office, his administration signaled that it might try to bludgeon Moscow into making peace by calling for a boost in oil production in the U.S. and Saudi Arabia, thus lowering prices. Trump’s special envoy to Ukraine, Keith Kellogg, suggested in January that if oil fell to $45 a barrel it might be enough to end the conflict.

When Trump unveiled a global list of targets for higher tariffs, Russia, along with only a handful of other countries, was missing. The administration said that the numerous sanctions on Russia had precluded meaningful trade with Moscow.

Russia, to be sure, has survived bigger oil-price downturns, including during the 2008 global financial crisis and the Covid-19 pandemic. The government can still borrow from domestic banks and cut nonmilitary expenditures, including on infrastructure, education or healthcare.

But for over three years of war, the Kremlin has sought to insulate its citizens from the conflict’s impact by boosting incomes and providing jobs. An economic downturn threatens to shake the foundation of Russia’s wartime social contract.

Russian officials know the stakes.

If the trade war continues, “this usually leads to a decrease in the world economy and demand for our energy resources," Elvira Nabiullina, Russian central bank governor, said this month. “Therefore, there are risks here."

The Kremlin said, “Authorities are doing everything to minimize the consequences for the Russian economy."

While financial markets have gyrated in recent days as traders digest changes coming out of Washington, oil’s outlook has been weighed down by rising supply from producers such as Saudi Arabia and slowing demand from China.

Goldman Sachs earlier this week said it expects Brent to average $63 a barrel this year and $58 in 2026. With Urals trading at a substantial discount to global prices, that forecast implies the price of a Russian barrel could fall below $50. Other commodities that Russia exports, like coal and metals, have also seen their prices fall in recent weeks. A slowdown in China driven by the tariff turmoil would also drag down the Russian economy.

Russian bank Renaissance Capital told its clients in a recent note that low oil prices raise the chance of a “hard landing" for the economy. The bank forecasts that if the price of Urals averages $50 this year, gross domestic product growth would be 0.1%.

That would be a shock for the Russian economy.

After a brief recession in 2022, massive government spending on the military has propped up Russia’s output and dulled the impact of Western sanctions. Russian GDP grew around 4% a year in both 2023 and 2024.

The war spending, though, created runaway inflation, pushing the central bank to raise interest rates to 21%, a record. This, coupled with persistent labor shortages as men go to war or flee the country, has begun to bite in recent months.

Russia has had to weather other steep falls in the price of its oil in recent decades.

Year-over-year GDP growth fell to 0.8% in February from 3% in January. Growth in everything from industrial production to car sales to rail cargoes has slowed this year.

Russia has been running a budget deficit throughout the war and has eaten through two-thirds of the liquid assets of its rainy-day fund, the National Wealth Fund, since its full-scale invasion of Ukraine.

Wary of being blamed for any downturn, Russian officials have already pointed to global conditions as responsible for the country’s economic woes.

Lower oil prices might cause an overall fall in living standards, said Vakulenko, the former Russian energy executive, “but if there is an external factor to blame, like a global depression, the population understands it’s not the government’s fault."

Write to Georgi Kantchev at georgi.kantchev@wsj.com and Alan Cullison at alan.cullison@wsj.com