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2025-04-11 Economy
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Trump's 'Onion': Why Russia Shouldn't Fear Falling Oil Prices
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Direct Translation via Google Translate. Edited.
by Ivan Lizan
[REGNUM] Oil at $40 per barrel is postponed. US President Donald Trump, who brought down world markets with his tariffs, has now rolled back the tariffs for some countries, except for those that have "sinned" especially. This primarily concerns China and the European Union.
Against this backdrop, the oil price chart, which had been nodding off, perked up and grew. However, this did not reduce the number of questions. What was that and what will Russia do if oil starts to cost $40?
TURNED ON THE REVERSE
Trump's tariff adventure has several layers, like an onion. The first is ideological: an attempt to restore justice - of course, in the American sense. The US created the current system of world trade, but has ceased to be its beneficiary, turning into an importer. The EU and China are now skimming off the cream.
The second is, of course, strategic: the US can no longer financially bear the burden of a superpower, so it must cut costs and take a course toward becoming a regional power. To do this, it is necessary to launch a program to restructure the American economy, which will certainly affect the global economy.
The third layer is practical. The US has accumulated a mass of economic problems that require solutions. This includes the exorbitant size of the national debt and the cost of servicing it, the federal budget deficit, and the negative trade balance.
An important diplomatic level: Trump, who will soon be 100 days into his second presidential term, needs diplomatic victories. And they are in trouble: Panama's ports have not been taken under control, Greenland and Canada have not become part of the United States, the Ukrainian crisis has not been resolved.
And then there’s the personal layer: Trump doesn’t have an adequate understanding of objective reality, he overestimates America’s place in the world and his capabilities as the US president.
All of this led to the launch of a new trade war. In a dashing cavalry charge, Trump managed to reduce the yield on 10-year Treasury bonds, the most important borrowing instrument for covering the US budget deficit. But then US allies, including Japan, began selling these same bonds, which blurred the effect of the maneuver.
To put it into perspective, the US spends over $1 trillion a year on debt servicing – now this is comparable to the Pentagon budget, which was recently increased by $150 billion.
However, this is clearly a Pyrrhic victory, since Trump has destroyed the last of his authority. Trust in the American financial system has also been undermined - it was not possible to significantly reduce the cost of servicing the national debt, and there is a real pogrom on the stock exchanges.
Judging by the reaction, many things came as a surprise to the Trumpists. Americans were overwhelmed by consumer panic, corporations came running to the White House with calculations of their losses, China and the EU showed enviable stubbornness, and the Republicans themselves did not show the expected unity with Trump. As a result, he, realizing the scale of the problems, wavered, but did not bend: tariffs on Chinese and European goods are still in effect.
WHO WILL BLINK FIRST?
As a result of the first round of the trade war, duties of 125% were imposed on China, making it unprofitable to supply goods to the United States. Last year, China supplied America with $439 billion worth of goods, or $36 billion a month.
Suppose that a protracted trade war cuts supplies in half and that this becomes the new normal in U.S.-China relations. In that case—if other markets fail to replace half of the lost supplies—the Chinese economy will shrink, and China's demand for oil will decline, and with it, world prices for it.
In this case, the United States and China will be drawn into a confrontation, the outcome of which will depend on their margin of safety.
On the PRC's side is $3.2 trillion in accumulated gold and foreign exchange reserves, which could be used to mitigate the crisis and make structural changes in the Chinese economy. On the US side is a reduction in the volume of the trade deficit at the cost of more expensive imports and the creation of colossal problems for American business.
There is no need to look far for examples. The cost price of the iPhone 16 Pro Max, as one of the most high-margin American goods produced in China, is about $485. And it is sold in the US at a price of $1,200. Doubling the cost of the smartphone means an automatic reduction in Apple's income, which will collapse its stock quotes and remove it from the camp of unicorn companies with a capitalization of over $1 trillion.
And this is Apple. And many other companies are even more dependent on the Chinese market, and they won’t be able to afford to ignore 125% import duties – they’ll go broke.
In this case, the US has less of a margin of safety than China, and Trump's position can hardly be called cast-iron. After all, in a year and a half he has midterm elections to Congress and the Senate, in which American voters traditionally give preference to the opposition.
Therefore, the likelihood that Trump will once again back off is very high. Especially since Beijing has no intention of giving in and lifting its duties on American products.
MOTHER OIL
Now it's time to return to Russia. By the beginning of 2025, oil and gas revenues provided about 30% of federal budget revenues. The figure looks impressive, but in 2014, oil and gas revenues provided 50% of "federal" revenues. And in the period from 2015 to 2019, this figure fluctuated in the range of 36-46%.
As you can see, the "people are the new oil" policy has borne fruit in 10 years. Against the backdrop of growing tax collection from citizens and businesses within the country, dependence on oil and gas has decreased. At the same time, over the past three years, the share of gas in the structure of oil and gas revenues has fallen to 20%.
The bulk of oil and gas revenues comes from the extraction, processing and export of oil: in different years, the share of the oil sector in total revenues fluctuated from 66% to 77%.
Therefore, the issue of oil prices has not only a theoretical but also a practical dimension: the reconciliation of budget debits with credits depends on them. And federal budget expenditures in 2025 are almost 2 times higher than expenditures for 2021: 41.4 trillion rubles versus 21.5 trillion.
At the same time, defense and security expenditures have almost tripled during this time. Simply put, ensuring that the budget is filled in the conditions of the SVO is no less a priority task than the conduct of the SVO itself.
This is precisely why the jumps in oil prices so frighten certain media-active citizens and make the domestic bureaucracy nervous.
And while globally the price of oil depends on the balance of supply and demand, prices are regularly distorted by several factors.
The first is oil's status as a commodity, which is affected by market unease. The second is the activity within OPEC+, whose members regulate the volume of oil production to maintain prices for "black gold" acceptable to all cartel members, mitigating for themselves the negative consequences of long-term changes in the oil market caused by reduced consumption.
Consumption itself is declining due to periodic crises, which are typical of any economy, especially a market economy.
Trump, with his actions, risks initiating just such a crisis – tariffs against China and the EU have been maintained.
DEBIT AND CREDIT
At the height of the jitters, the price of Brent crude - with Russia's Urals trading at a discount to it - fell from $67 a barrel to $57, then rose to $62.
The federal budget for 2025 is based on oil at $67 per barrel, while in neighboring Kazakhstan the budget included oil at $75 per barrel, and in distant Saudi Arabia at $93. Therefore, short-term fluctuations in oil prices are not a problem.
Firstly, quotes are rising again. In 2020, Russian Deputy Energy Minister Pavel Sorokin estimated the cost of Russian oil production in the range of $9 to $20 per barrel, depending on the project.
At the same time, the cost of shale oil production in the US varies between $30 and $60, depending on the region and the technologies used.
As you can see, the Russian oil industry has a much higher margin of safety than the American one, and the first to leave the market with oil at $40-50 per barrel will be the American shale oil industry.
Therefore, cheap oil is not beneficial for the US itself - it will ruin the oilmen as a support for the Republicans, and will also begin to transform the US from an exporter to an importer of oil.
At the same time, we should not forget about the successful interaction of OPEC+ countries to maintain oil prices.
Secondly, the Russian bureaucracy has developed a number of tools to reduce the impact of fluctuations in oil prices on federal budget revenues.
The main instrument is the budget rule, according to which all excess budget revenues from oil sales above a certain price level are directed to the National Welfare Fund.
At the beginning of the SVO, the budget rule was cancelled, but since 2025 it has been in effect again. The cut-off price is set at $60 — everything above that is directed to replenish the National Welfare Fund. Therefore, the first thing federal authorities will do when serious problems with replenishing the budget arise is to adjust the budget rule again.
By the way, the liquid part of the National Welfare Fund, although continuing to shrink, exceeded 3.26 trillion rubles (1.5% of GDP) by the end of March, and the peak of budget expenditures for this year has already passed - the government has advanced many expenditure items.
In the meantime, the dollar exchange rate is creating far more problems for the federal budget: the dollar is budgeted for this year at 95.6 rubles per unit, while it is currently being sold at 87.6 rubles. The ruble has strengthened precisely against the backdrop of renewed contacts between the US and Russia.
But here too the federal government has tools, including adjusting the standard for mandatory return of foreign currency earnings by exporters. And at worst, it is always possible to lower the ruble exchange rate in order to increase the ruble revenues of the federal budget against the backdrop of a reduction in foreign currency trade.
In general, there are no grounds for panic yet, and rumors about Russia's death from malnutrition caused by falling oil prices are greatly exaggerated. The domestic bureaucracy has drawn conclusions from previous oil crises, and even despite the ongoing SVO, the economy and budget have a margin of safety.
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Posted by badanov 2025-04-11 00:00||
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