A prolonged closure of the Strait of Hormuz could deliver short-term fiscal relief to Moscow through higher oil and gas prices, but regime change in Tehran would risk stripping Russia of one of its most important strategic allies.

WHAT: Escalation of the US-Iran conflict threatens a prolonged blockade of the Strait of Hormuz, tightening global oil and LNG supply and lifting prices, with potentially significant consequences for Russia’s economy and budget.

WHY: Higher prices would ease mounting fiscal pressure on Moscow and improve the outlook for sanctioned Russian crude and LNG, while weakening enforcement of Western price caps.

WHAT NEXT:  However, broader war that topples Iran’s leadership or eventually brings more Iranian oil back to market could undermine Moscow’s longer-term strategic and economic interests.

Russia could reap unexpected benefits if the escalation of the US-Iran conflict were to cause a prolonged blockage of the Strait of Hormuz, the world’s most critical oil and gas transit route. Yet Moscow also faces strategic risks if the war leads to the collapse of the Iranian regime – a key regional ally.

Following joint-US and Israel strikes on Iran that began on February 28, Tehran warned that vessels would not be permitted to transit through the Strait of Hormuz, blocking a waterway used to transport 20mn barrels per day of oil, equivalent to roughly a fifth of global supply. The impact on oil prices so far has been relatively subdued, at least compared with the spike in natural gas prices as a result of disruptions in Qatari LNG shipments through the strait. As of 07:00 GMT on March 3, Brent was trading at $78.3 per barrel, up from $73 at the close of trading last week, prior to the conflict starting.

However, a prolonged disruption of maritime traffic through the strait would trigger a further rally. Saudi Arabia and the other producers that use the waterway can realistically divert only approximately a quarter of the 20m bpd to other export routes. Citigroup’s base case is that Brent will rise to $80-90 per barrel if the Strait of Hormuz remains closed over the coming week. Wood Mackenzie meanwhile forecasts $100 per barrel oil if traffic is not restored quickly. 

Dutch bank ING considers $140 per barrel a worse-case scenario, if oil supply disruptions are significant and extended.

Fiscal pressure

For Russia, the tightening of supply carries a clear economic upside given its state budget remains heavily reliant on oil revenues. Sanctions pressure has started to significantly bite, causing export volumes to slide and further deepening the discount its oil trades at versus Brent and other benchmarks.

Russia’s oil and petroleum product revenues were down 40% year on year in January at $11.1bn, and Reuters predicts them to halve in February. According to S&P, Russian seaborne oil exports dropped 11.3% month on month to 3.4mn bpd in January, driven by a 55% crash in deliveries to India, which has drastically cut Russian purchases under threat of secondary sanctions by the US.

Russia’s war-time economy, which has defied expectations amid record defence spending, began to show cracks last year, with growth dropping to 1% from around 4% in both 2023 and 2024, and a further slowdown had been widely anticipated this year. Its budget deficit widened by 17% year on year, reaching RUB17.4 trillion ($226bn), forcing austerity measures that could spark greater opposition against the government and its war.

Under this pressure, Russian Finance Minister Anton Siluanov said on February 26 that the government was preparing to tighten its fiscal rules, by lowering the baseline oil price above which it sends proceeds to its National Wealth Fund, currently set at $60 per barrel. Russian oil has been trading at lower than this level for months, and according to Bloomberg, officials are considering slashing that threshold to as low as $45-50 per barrel.

A sustained rally in oil prices would therefore ease immediate fiscal pressure on Moscow, especially if, with the market faces shortages, it narrows the discount on Russia’s flagship Urals blend, which has traded well below global benchmarks since the EU and G7 introduced a price cap and embargo three years ago. A tightening global market would make enforcement of the price cap more complex, as refiners in countries like India and China would have fewer options. Notably the Strait of Hormuz’s closure and the broader conflict also creates issues for Iranian oil exports, depriving China of a valuable source of discounted crude it has enjoyed for years. 

Gas gains

Beyond oil, the Strait of Hormuz’s closure will also create gains for Russian LNG, because of the disruption to Qatari shipments which account for one-fifth of global LNG supply. Cargoes from the Yamal LNG and Sakhalin LNG plants will sell for more in both Asia and Europe, especially spot cargoes but also those sold under longer-term contracts depending on the pricing formulas.

China, which relies on Qatar for a quarter of its LNG supply, may also be encouraged to take more LNG supply from Russia’s Arctic LNG-2 plant, in defiance of US sanctions on the project. China has been taking cargoes from the plant since last autumn but has routed them only to a single port, to mitigate the impact if the US applied secondary sanctions.

Other buyers scrambling for replacement LNG in Asia might also be tempted to start taking cargoes from Arctic LNG-2, if they consider that acquiring alternative and discounted LNG outweighs the risk of sanctions.

Depending on how long Qatari shipments are disrupted, and how severe a gas crisis this causes in Europe, the EU may also consider delaying its phase-out of remaining Russian pipeline gas and LNG. Under the current legal agreement, the bloc will prohibit short-term contracts for Russian LNG as soon as April 25, and all Russian LNG imports are to end by the start of 2027, with pipeline imports winding down later that year.

The obvious downside

All this is not to understate the geopolitical blow that Russia would suffer if the conflict triggers a collapse of the Iranian regime, long a critical military and diplomatic partner for Moscow in the Middle East. Russia has already seen its influence in Venezuela, its long-time ally in Latin America, significantly diminish with the recent US overthrow of President Nicolas Maduro. The Trump administration is reported to be also pursuing regime change in Cuba, applying economic pressure through a de-facto fuel embargo.

The toppling of the Iranian regime could potentially open the door to a more Western-aligned government, undermining Moscow’s defence and economic cooperation with Tehran. If it also led to an easing of oil sanctions on Iran, it could also drive an increase in oil exports from the country, which holds some of the world’s largest untapped oil and gas reserves. This in turn would place downward pressure on Russian oil and gas revenues in the long term.