How Oil Windfalls and Sanctions Failures Fund Russia's War

On September 26, 2025, an oil terminal is depicted in the port with a bridge in the backdrop of St. Petersburg, Russia. Reports indicate that in January and February of 2025, Russia faced its worst financial crisis since the onset of its full-scale invasion of Ukraine. Revenue from oil and gas plummeted by 50% compared to the previous year, and the budget deficit reached a staggering $42 billion in the first two months. In response, the government prepared to cut non-military expenditures by 10%. It seemed that sanctions were finally taking effect.

However, the situation changed dramatically when the United States launched a strike against Iran, closing the Strait of Hormuz, through which one-fifth of the world's oil passes (and over 30% when considering maritime transport). Almost simultaneously, the Trump administration granted India permission to legally purchase Russian oil. As a result, Russia's average daily oil export revenues doubled—from $135 million in January to $270 million in March. The Kremlin canceled planned budget cuts and continued to fund its war as if nothing had happened.

According to a Kremlin insider quoted by The Guardian: "For our budget, the attack on Iran is a big plus." This candid acknowledgment highlights the shifting dynamics. The price of Brent crude rose from $60 per barrel in February to over $112 in March. Urals crude surged to $102 on the spot market. In comparison, the G7 and EU price cap at that time was set at $44. Russia was selling oil at 2.3 times the 'maximum allowable' price under sanctions.

On March 5, OFAC issued a permit for India, which was extended on March 12 until April 11. Indian refineries purchased approximately 60 million barrels. U.S. Treasury Secretary Scott Bessent estimated Russia's additional revenues at "no more than $2 billion." Meanwhile, Ukrainian President Volodymyr Zelensky cited a figure five times higher—$10 billion. The exact amount remains uncertain, but given recent events, more pessimistic estimates appear more justified.

The EU and the UK have refused to ease sanctions, for which Ukraine is sincerely grateful. However, the strategic divergence between Europe and Washington has become a boon for Russian propagandists, who hastily declared that even America recognized the world's need for Russian oil.

Analysts have calculated that if prices remain stable, annual revenues from oil and gas could reach $180 billion—three times what the Kremlin earned during the winter of 2025-2026 and nearly double the total for 2025.

The G7 price cap was based on the assumption that the West controls maritime insurance and transportation. However, Russia has invested in a shadow fleet: around 350 vessels in this fleet transport 56% of the volume. Sixty-seven percent of all Russian crude oil is shipped beyond the jurisdiction of the G7.

An academic study based on 25,399 cargo records claims that the price cap has never been a real limitation. The EU understands this and is already considering a complete ban. This is something that should have been done back in 2023, but it did not happen.

Oil profits allow the Kremlin to avoid what it fears most: general mobilization or, even more terrifying for Putin, abandoning plans to seize Ukraine. Instead of conscription, Russia is currently operating on a system of financial incentives: regions compete to offer the highest signing bonuses for contracts with the Ministry of Defense.

By the end of 2025, most regions sharply cut these bonuses—they simply could not afford them. But the Kremlin responded, and regions began to restore payments. St. Petersburg leads with 4.5 million rubles ($55,000). The Khanty-Mansi Autonomous Okrug offers 4.1 million ($51,000). Another 23 regions offer over two million (around $24,000).

For poorer regions, this competition for bonuses is catastrophic. In Mari El, recruitment payments consume 10% of the budget—equivalent to the entire healthcare system. But Moscow remains indifferent: as long as oil money continues to flow, regions will pay and remain silent.

Can anything be done about this? Probably yes, but it will be difficult. First, it is necessary to honestly acknowledge that the price cap is dead. As mentioned, the EU is "considering" more effective alternatives. But "considering" is a favorite sport of the EU.

We appreciate Europe's efforts, but key decisions are usually made a bit later than urgently needed. Europe can act without Washington, as it has already demonstrated. Detaining tankers from the shadow fleet, conducting inspections in straits, and banning the passage of vessels without documentation are technically feasible steps that would sharply increase the cost of circumventing sanctions, but they are being implemented slowly.

For its part, Ukraine must continue strikes on Russian oil refining and port infrastructure. From March 22 to March 31, Ust-Luga was struck five times in ten days, after which it suspended the unloading of oil and petroleum products.

Transneft tanks, the state company of Russia that operates the country's pipelines, at the Ust-Luga oil terminal in the Leningrad region, Russia, on March 5, 2022. A screenshot from a video published on Telegram shows a large fire at the Ust-Luga oil terminal in the Leningrad region, Russia, on the morning of March 25, 2026. The port, with a capacity of approximately 700,000 barrels per day, is one of the key nodes for oil export supplies in the Baltic region. Other facilities were also struck simultaneously. As a result of these strikes, at least 40% of Russia's oil export capacity was incapacitated—marking the largest disruption in oil supply in the modern history of the country, coinciding with the moment when prices exceeded $100 per barrel due to the war in Iran.

On the night of April 6, Ukraine struck the oil terminal.