KSE Institute has published a study, “Assessment of the Impact of the Iran War on Russia,” which provides a preliminary estimate of how escalation in the Middle East could boost Russia’s energy exports and strengthen its ability to continue the war against Ukraine. 

The current crisis has already become a major challenge to the sanctions against Russia. Disruptions in the Strait of Hormuz are pushing global oil and gas prices sharply higher, while discounts on Russian oil will come under pressure and sanctions easing by the US allows to increase export volumes—thereby directly increasing Russia’s export earnings and budget revenues.

Depending on the duration of the conflict, oil prices could remain around $100 per barrel for a few months or rise above $150 for a prolonged period. In a most pessimistic scenario, gas prices could increase to $40/mmbtu.

KSE Institute considers three scenarios that differ in the duration of the active phase of the war and the time required to restore production and energy flows:

• Optimistic scenario: if the active phase lasts six weeks and flows recover within about a month, Russia could generate an additional $84 billion in export revenues and $45 billion in budget revenues in 2026, compared to a no-war scenario—moderately reducing macro vulnerabilities.

• Central scenario: with an active phase lasting until the end of May and higher prices, additional revenues could reach approximately $161 billion in export revenues and $97 billion in budget revenues.

• Pessimistic scenario: with six months of active war and  much slower post-war restoration of supplies, export revenues could rise to $252 billion and budget revenues to $151 billion, likely leading to a budget surplus and allowing Russia to sustain high military spending for years.

These developments come at an opportune time for Russia. Before the start of the current crisis, Russia’s economic position had been getting increasingly challenging. Oil and gas export earnings were declining—falling almost 50% year-over-year in January-February and dropping to their lowest level since the Covid pandemic. Importantly, oil export and production volumes fell markedly for the first time in four years. This was putting serious pressure on the budget, with the deficit exceeding RUB 3.4 trillion in the first two months of the year. In response, the government was considering spending cuts and may have been forced to increase taxes further.

Recommendations

KSE Institute stresses that limiting the duration of the crisis is critical, as prolonged high energy prices directly strengthen Russia’s financial position, while creating additional pressure on the global economy.

The report highlights that further easing of sanctions on Russian oil and gas would not address supply constraints but would significantly weaken the effectiveness of the sanctions regime. Any temporary waivers should be fully reversed once the market stabilises.

After the end of the crisis, policymakers should return to measures aimed at reducing Russian export volumes, including restrictions on maritime services for transporting Russian oil.