Since the outbreak of the Russia-Ukraine conflict, oil and gas exports have been the cornerstone of Russia's finances. However, as the conflict approaches its fourth anniversary, these cash flows have abruptly shrunk to levels not seen in years.

This situation stems from a new round of punitive measures by the US and the EU, pressure from US President Trump on India regarding tariffs, and a tightening crackdown on the "shadow fleet" of tankers transporting Russian oil while evading sanctions.

The revenue decline is forcing President Putin to borrow from Russian banks and increase taxes to temporarily maintain national fiscal stability. However, these measures only exacerbate economic pressures already troubled by slowing growth and persistent inflation.

In January, Russia's tax revenue from the oil and gas sector fell to 393 billion rubles (approximately $5.1 billion), a significant drop from 587 billion rubles ($7.6 billion) in December and 1.12 trillion rubles ($14.5 billion) in January 2025. Janis Kluge, a Russian economy expert at the German Institute for International and Security Affairs, stated this is the lowest level since the COVID-19 pandemic.

A New Sanctions Approach

To force the Kremlin to cease hostilities, the Trump administration imposed sanctions on two major Russian oil companies, Rosneft and Lukoil, effective November 21st. This means any entity purchasing or transporting their oil risks being cut off from the US banking system—a significant risk for any multinational corporation.

Furthermore, the EU banned imports of fuels refined from Russian crude oil effective January 21st, meaning Russian crude cannot be processed in third countries and then sold to Europe as gasoline, diesel, etc.

European Commission President Ursula von der Leyen on Friday proposed a comprehensive ban on shipping services for Russian oil, calling sanctions leverage to force Russia to halt its military campaign. "We must be clear: only under pressure will Russia come to the negotiating table with real sincerity," she said.

The latest sanctions go beyond the oil price cap mechanism implemented by the G7 from 2022-2024. The $60 per barrel cap, enforced through G7 insurers and shipping companies, aimed to reduce Russian profits rather than ban imports outright, to avoid spiking global energy prices.

The cap briefly reduced Russian government oil revenues, especially after the EU banned most Russian seaborne crude, forcing Russia to pivot to sales to countries like India. However, Russia assembled a "shadow fleet" of older tankers不受约束 by the cap, and revenues subsequently recovered.

Pressuring India to Halt Russian Oil Imports

On February 3rd, Trump agreed to reduce tariffs from 25% to 18%, stating that Indian Prime Minister Modi had agreed to stop importing Russian crude; on Friday, he cancelled the additional 25% tariff imposed due to India's continued imports.

Modi has not yet commented. Indian Ministry of External Affairs spokesperson Randhir Jaiswal stated India's strategy is "to diversify energy sources based on objective market conditions." Kremlin spokesman Dmitry Peskov said Moscow is closely monitoring the statements and remains committed to advancing the Russia-India "deepening strategic partnership."

Regardless, Russian oil exports to India have declined in recent weeks: from a peak of 2 million barrels per day in October to 1.3 million barrels per day in December, according to the Kyiv School of Economics and the US Energy Information Administration. Data firm Kpler noted, "It is unlikely India will completely wean itself off cheap Russian energy in the short term."

Ukraine's allies are increasingly targeting individual "shadow tankers" with sanctions to deter customers from buying Russian oil—the US, UK, and EU have now sanctioned 640 tankers. The US Navy has seized several vessels involved in sanctioned Venezuelan oil shipments, including one flying the Russian flag; France briefly detained a vessel suspected of belonging to the shadow fleet. Ukrainian strikes have targeted Russian refineries, pipelines, export terminals, and tankers.

Russian Oil Trades at Steep Discounts

Now, buyers are demanding steeper discounts for Russian oil to hedge against the risk of violating US sanctions and the difficulty of finding payment channels that circumvent banking restrictions. In December, this discount widened to about $25 per barrel: Russia's primary export crude, Urals, fell below $38 per barrel, while the international benchmark Brent crude was around $62.5 per barrel.

Since Russian oil production taxes are linked to the oil price, the discount directly erodes state revenue.

"This is a cascading, domino effect," said Mark Esposito, Senior Analyst for Crude Oil Shipping at S&P Global Commodity Insights. Sanctions on diesel and gasoline form "a very impactful one-two punch, affecting not just the flow of crude but also the flow of products refined from that crude... Simply put, if it originates from Russian crude, it's excluded."

Low buyer willingness has led to about 125 million barrels of crude being stored on tankers at sea. This drives up the cost of scarce shipping capacity, with daily rates for Very Large Crude Carriers reaching $125,000, "which is directly related to the impact of sanctions," Esposito said.

Slowing Growth Intensifies Russian Budget Pressure

Compounding the problem, the stimulative effect of military conflict spending has peaked, and labor shortages are restricting business expansion, causing Russia's economic growth to stagnate. Slower growth means less tax revenue. Third-quarter GDP grew by only 0.1%. Growth forecasts for this year are between 0.6% and 0.9%, far below the over 4% seen in 2023 and 2024.

"I think the Kremlin is worried about the overall budget balance because this is happening alongside an economic downturn," Kluge said. "At the same time, the cost of the war is not decreasing."

The Kremlin's Response: Taxes and Debt

To fill the gap left by shrinking oil and gas revenue and slowing growth, the Kremlin has resorted to tax hikes and borrowing. The Kremlin-controlled State Duma increased the value-added tax from 20% to 22% and raised duties on car imports, tobacco, and alcohol. The government has also increased borrowing from domestic compliant banks, and the National Wealth Fund still has reserves to plug budget holes.

Consequently, the Kremlin currently still has funds available. But tax hikes could further slow growth, and borrowing could fuel inflation—the Russian Central Bank has kept interest rates at 16% to bring inflation down from a peak of 21% to 5.6%.

"In another six months to a year, this could also affect their calculations regarding the armed conflict," Kluge said. "I don't think they will seek a peace agreement because of this, but they might want to reduce the intensity of fighting, focus on specific areas of the front, and slow the pace of the war. If the cost becomes too high, this is how they will react."