Russia's oil comeback: how war de-escalation could widen Iraq's fiscal gap
Shafaq News/ Iraq’s economy, heavily reliant on oil revenues, facesgrowing uncertainty as global energy markets remain volatile. With over 90% ofthe country’s government revenue stemming from oil exports, any significantdecline in prices could strain the national budget and widen the existingfiscal deficit.
As the Russia-Ukraine conflict nears potential de-escalation, concernsare mounting over the possibility of eased sanctions on Moscow, leading toincreased Russian oil production and a subsequent drop in global oil prices.Such a scenario would directly impact Iraq, whose financial stability is tiedto crude oil sales.
$70 Benchmark Under Threat
Iraq’s financial health remains closely linked to shifts in global oilmarkets. A potential ceasefire between Russia and Ukraine could lead toincreased Russian crude production or a relaxation of Western sanctions,introducing additional supply into the market and exerting downward pressure onoil prices.
“Any agreement that leads to lower oil prices will affect Iraq,” statedIntissar Al-Jazairi, a member of Iraq’s parliamentary oil and gas committee.“Ninety-five percent of government salaries rely on oil revenues, and there isno alternative at present.”
In early 2024, Iraq’s budget calculations were based on an estimated oilprice of $70 per barrel. However, Brent crude oil averaged approximately $83per barrel in the first quarter of the year, while West Texas Intermediatefluctuated between $75 and $80 per barrel. Despite these relatively strongprices, Iraq’s dependency on oil leaves it vulnerable to future pricedownturns.
For 2024, the government projected total revenues of $86 billion,largely derived from oil exports. However, a sustained drop in prices couldforce Baghdad to reconsider its fiscal policies, including potential wagereductions in the public sector or delays in infrastructure projects. Nearly 9million public sector employees rely on government salaries, and any disruptionin payments could exacerbate economic difficulties.
Iraq already faces a fiscal deficit of approximately 64 trillion Iraqidinars ($44 billion). Should oil prices experience a steep decline due toincreased global production, this deficit could expand, threatening keydevelopment projects and essential public sector funding.
Asian Market Battle
The global oil market remains highly competitive, and any increase inRussian output could intensify challenges for Iraq, particularly in key marketssuch as China and India—two of its largest oil customers. The Ukraine conflicthas already reshaped global energy dynamics, and a surge in Russian crudeexports could further shift market balances.
Energy expert Ali Al-Saadi emphasized the risks posed by closercoordination between Moscow and Washington. “Any cooperation between Russia andthe United States in the energy sector could significantly alter global oilsupply, especially if it results in increased production from both countries.”
Al-Saadi pointed out that the US has strengthened its position as aleading oil producer through its shale industry, while Russia continues tomaintain a strong export presence. A simultaneous production increase by bothnations could drive prices lower, reshaping the power dynamics in global markets.
For Iraq, this scenario presents a difficult challenge. Approximately67% of its total crude shipments are directed toward Asian markets, wherecompetition with Russian oil is expected to intensify. Maintaining market sharecould necessitate price reductions, potentially undermining revenue.
“Any decline in oil prices means Iraq will not only earn less from itsexports but could also see its foothold in key markets like Asia and Europeweaken,” Al-Saadi warned.
According to the International Energy Agency (IEA), Russia exported anaverage of 4.7 million barrels per day (bpd) of crude oil in 2024, with Chinaand India purchasing nearly 80% of those shipments.
In comparison, Iraq’s crude oil exports averaged around 3.3 million bpd,with 67% directed toward Asian buyers. Increased competition could force Iraqto offer deeper discounts to retain key customers, particularly India, whichhas become a major importer of Russian crude since 2022.
Brent crude prices fluctuated between $75 and $80 per barrel over thepast year, but analysts caution that a production surge from Russia and theUSturk could push prices below $70 per barrel. A prolonged decline wouldfurther strain Iraq’s fiscal revenues, potentially compelling the government torevise its budgetary projections, delay infrastructure projects, or reconsiderits production strategy within OPEC+.
OPEC+ Tensions
As a key member of OPEC+, Iraq plays an essential role in the alliance’sefforts to stabilize oil markets. However, Russia’s strategic economicpriorities have sometimes diverged from OPEC+ agreements, raising concernsabout the potential impact on collective price management efforts.
Oil Minister Hayan Abdul-Ghani has reiterated Iraq’s commitment to OPEC+policies. “We remain committed to maintaining production levels in line withOPEC+ agreements to support price stability. Our priority is ensuring Iraq’seconomic security in a fluctuating market.”
Despite Baghdad’s adherence to OPEC+ directives, fears persist thatRussia’s increasing output could weaken the alliance’s ability to sustainstable prices. “Russia has a track record of making decisions that serve itseconomy, often at the expense of OPEC+ policies,” Al-Saadi remarked.
Cautionary Optimism
Although concerns over oil price volatility remain prevalent, someexperts suggest that broader geopolitical stability could offer Iraq a degreeof relief. If a ceasefire in Ukraine leads to a reduction in geopoliticalrisks, oil prices could stabilize or even rebound, strengthening Iraq’sfinancial outlook.
Economist Mustafa Faraj noted the potential benefits of reduced globaltensions. “If this agreement leads to a sustained decrease in geopoliticalrisk, we could see Brent crude prices climb back above $85 per barrel in thecoming months. That would be a welcome boost for Iraq, where oil revenuesaccount for nearly 90% of the national budget.”
The IEA projects a 1.2 million bpd increase in global oil demand in2025, largely driven by economic recoveries in China and India. Rising demandcould provide Iraq with greater market stability and improve revenue prospects.
However, oil market analyst Hamza Al-Jawahiri cautioned againstexcessive optimism, emphasizing that price volatility remains the mostsignificant challenge. “Even if Iraq maintains its current export levels, theprice per barrel is what will determine fiscal stability.”
Iraq’s 2025 budget is based on an assumed oil price of $70 per barrel.Should Brent crude prices fall to $65 or lower, the government may facedifficulties in meeting its projected $152 billion budget, potentially leadingto spending cuts or increased borrowing to cover financial shortfalls.
