​Why The Oil Price Won’t Affect Ukraine War Negotiations

While some analysts believe lower oil prices could force Russia to make concessions during negotiations to end the Ukraine conflict, there are several reasons why this may have a limited impact on the Kremlin’s negotiating position. For one thing, Russia is far less dependent on oil revenues than it used to be while higher gold prices bolster the Kremlin’s financial position.

After US President Donald Trump announced his shocking "Liberation Day" tariffs, oil prices experienced a rapid and significant decline. Global benchmarks for crude dropped from over $80 per barrel in January to around $60 within weeks of the announcement. Oil traders started pricing in a global recession with Trump’s trade disruptions expected to dampen oil demand.  

Oil prices dropped by more than 11% in April alone with the forecast for the price of Russian crude grades declining from an average of $70 to just $55 per barrel. As a result, Russia’s fiscal deficit was revised upwards from 0.5% to 1.7% of GDP in government forecasts. But following the recent pauses on Trump’s tariffs, oil prices have already began to recover, and Russia’s projected annual oil and gas revenues are still expected to exceed $100 billion.

While the decline in oil prices since the start of the year is undoubtably a blow to Russia, the higher revisions for the Russian budget deficit pale in comparison to a US fiscal deficit at over 6% let alone Ukraine’s deficit at nearly 20% of GDP. Additionally, due to unprecedented US and European sanctions, Russia has already been selling its oil at a discount to Asian markets.

In exchange for these discounts much of this Russian crude has been sold under long-term contracts, particularly to India, which refines Russian oil and re-exports the petroleum to the European Union. This means lower international benchmark prices for crude may not hit Russia until those long-term contracts expire.

While low-cost producers like Saudi Arabia and Iran are better positioned for lower prices, Russian oil production costs are similar to Norway, averaging around $40 a barrel compared to roughly $60 per barrel for US shale producers. As such, lower oil prices could end up hurting US producers more than their Russian counterparts.

At the same time, while oil exports still account for 25% of Iran and Saudi Arabia’s GDPs, Russia has several other major sources of export revenue including wheat and gold exports. Russia is the world’s second largest gold producer and the recent 40% increase in gold prices compared to the 2024 average will certainly help boost Russia’s coffers.  

Similarly, while Saudi Arabia and Iran's oil production costs are lower than Russia's (at around $10 a barrel), these countries still depend heavily on oil revenues to fund their budgets whereas Russia is far better diversified. Accounting for almost 30% of the Russian economy in the early 2000s, oil and gas revenues are forecast to account for just 3.7% of Russia’s GDP in 2025.

The prospect of peace also creates a new calculus for China with US-Russia trade already beginning to recover on the prospects of a peace agreement. In recent years, Chinese banks and businesses have been weary of doing business with Russia out of fear of secondary sanctions and despite tensions with the US, the American market simply meant more to Chinese business.  

But now that peace in Ukraine appears more likely Chinese banks and businesses have much less to lose by doing business with Russia. This could impact natural gas markets, with China increasing its purchases from Russia. LNG prices already remain above historical averages and the tariff pauses should see prices trend higher. Meanwhile, Russia is still the second biggest supplier of gas to the EU despite Brussels’ sanctions.  

Oil markets also tend to overreact to major news events and then moderate later on. During the coronavirus pandemic, oil futures fell below zero even though the world consumes 100 million barrels per day. Similarly, after Russian forces entered Ukraine in 2022, crude prices spiked to $150 a barrel even though Russian oil continued to flow to global markets.

We are seeing a similar situation today with oil markets having priced in a global recession that now appears much less likely to happen. As the Trump administration continues rolling back its trade levies, first on the UK, and more recently on China, the trade war induced recession JP Morgan predicted had a 60% chance of occurring now seems far less likely to happen.  

At the same time, the war in Ukraine has actually provided a major boost to Russia, which has overtaken Germany to become Europe’s largest economy. Demand for military equipment and sanctions on goods Russia once imported from other countries has forced Russia to re-industrialize and diversify its economy even further, making oil revenues far less important.

The ruble has also recovered in recent months, emerging as the best performing currency of 2025. While this does put some pressure on the Russian budget because oil revenues are now much lower in ruble terms, this also means inflation is likely to slow down and proves Russia’s economy remains resilient despite lower oil prices and unprecedented sanctions.  

While both the US and Russia appear eager to make a deal to end the bloodshed, it seems both Washington and Moscow are hoping the other side will be the one to make concessions. A further complication is that there are multiple parties to the conflict, including various countries across the European Union. This makes reaching an agreement a more complex endeavor.

After the infamous argument between Trump and Zelensky at the White House, it is uncertain whether Washington and Kiev are totally in agreement. Trump’s envoy Steve Witkoff has been granted several meetings with Putin and there has even been talk of recognizing Russian control over Crimea. Nevertheless, even if the White House reaches an agreement with the Kremlin, Zelensky may scupper a deal by refusing to accept territorial concessions.

Countries like France and Britain could also act as spoilers having called for putting boots on the ground in Ukraine despite this being a red line for Putin. Although the US appears to have ruled out NATO membership or similar security guarantees for Ukraine, Kiev and its European allies continue to promote plans that contradict the terms Russia and the US are negotiating.

So while lower oil prices are not ideal for Russian producers, long-term contracts, modest production costs, tariff rate reductions, and an increasingly well diversified Russian economy all suggest that oil prices are unlikely to have a major impact on negotiations.