The End of a Temporary Respite: The Islamabad Agreement, Oil Markets and Russia’s Structural Vulnerability in Energy Revenues

The first half of 2026 has once again, and in a most striking manner, highlighted the sensitivity of international energy markets to geopolitical shocks. Following the military operations launched by Israel and the US against Iran on 28 February 2026, the escalating conflict dramatically increased risks to global energy supply security, whilst the near-complete halt to shipments through the Strait of Hormuz sent shockwaves through the markets on a historic scale. During this period, the paralysis of the Strait of Hormuz—which accounts for approximately one-fifth of global oil trade—laid the groundwork for a serious energy security crisis in major importing economies, particularly in Europe and East Asia. However, the most unexpected beneficiary of the crisis was, once again, Russia, which positioned itself outside the immediate conflict zone and knew how to turn energy price volatility to its advantage. Nevertheless, the Islamabad Agreement, signed on 14 June 2026 under Pakistan’s mediation and which came into force on 18 June, has clearly demonstrated just how fragile the foundation of this temporary advantage is. This development, which brought Russia’s period of false recovery to an end, also brings into question the structural limitations of Moscow’s war economy model, which relies on energy revenue dependency.

Crisis Context and Market Dynamics

The course of the Hormuz crisis is of immense analytical value in demonstrating how oil markets price in geopolitical risk. The price of Brent crude, which had been hovering around $70 per barrel prior to the war, rose to $99.6 in March, $102.8 in April and averaged $103.7 in May, reaching its peak during the conflict. Throughout this period, the price per barrel of Brent crude experienced sharp fluctuations between $75 and $126 over a 100-day period, driven by supply concerns and expectations regarding diplomatic efforts. This volatility has gone down in the records as one of the rare periods that concretely demonstrated just how geographically concentrated and fragile the global oil supply is, and how a disruption at any bottleneck has the potential to trigger a systemic shock.

The International Energy Agency (IEA) reported that global oil supply fell to 94,470,000 barrels per day in May 2026, a decrease of approximately 600,000 barrels per day compared to the previous month, and that this figure remained below the pre-US/Israel-Iran War level of approximately 13,600,000 barrels per day. A supply disruption on this scale represents an extremely exceptional scenario in global energy history. By way of comparison, during the 1973 OAPEC oil embargo, there was a daily supply loss of approximately 4.3 million barrels; the cumulative supply loss resulting from the 2026 crisis far exceeds this figure. Whilst the IEA’s 32 member countries agreed to release 400 million barrels from their emergency reserves into the market, approximately 164 million barrels of this had been utilised as of 8 May; however, despite the release of reserves, the decline in global crude oil stocks has continued.

A distinctive aspect of this situation was that, whilst Gulf countries within the OPEC+ group were able to take decisions to increase production due to disruptions in the Strait of Hormuz, they were effectively unable to implement these increases. The impact on the market of OPEC+’s decisions to increase production by a total of 600,000 barrels per day on paper for April, May and June has remained extremely limited, as OPEC+ member countries in the Gulf region have been unable to utilise their actual production capacity. This dysfunction has created a critical market dynamic for Russia: the fact that it is both benefiting from high prices and unable to replace Gulf supply has strengthened Moscow’s hand.

Russia’s Opportunistic Positioning and Financial Gains

Russia has sought to transform the Hormuz crisis into a highly strategic opportunity amidst an environment where the sanctions regime in place since 2022 has systematically eroded its budget revenues. This positioning reflects a mechanism that operates in direct contrast to the ‘weaponised interdependence’ framework conceptualised by Farrell and Newman (2019) in the literature on international relations: rather than wielding direct leverage, Russia has passively yet consciously capitalised on a crisis of interdependence created by others.

As disruptions in the Strait of Hormuz threatened global oil supplies and drove up prices, the US administration granted temporary flexibility on certain sanctions against Russian oil in order to alleviate market tightness. The diplomatic backdrop to this flexibility is extremely interesting: Washington was forced to grant Moscow concessions to balance global energy supplies, thereby enabling Russia to partially circumvent the sanctions regime imposed due to the war in Ukraine by seizing the opportunity presented by the Middle East crisis. Indeed, Russian Finance Minister Anton Siluanov has opportunistically capitalised on the transformation of the petrodollar system in his favour, stating: “Due to the situation in the Strait of Hormuz, oil payments are shifting from traditional dollar transactions to the yuan.”

The financial gains achieved are also tangible. The Russian financial institution Sberbank has revised its 2026 commodity export forecast upwards, assessing that the rise in oil prices caused by the war in the Middle East has had a positive impact on Russia’s commodity export revenues. Meanwhile, Russian Finance Minister Anton Siluanov has announced that the rise in oil prices has generated approximately 200 billion roubles in additional revenue for the budget. Siluanov also stated that, should current oil prices be maintained until the end of the year, approximately 1 trillion roubles could be transferred to the National Welfare Fund, predicting that the country’s financial reserves would be strengthened. Kate Dourian, a visiting fellow at the Washington-based Institute for Gulf States, also highlighted that the conflicts in the Middle East have provided Russia with an unexpected increase in revenue, noting that, thanks to the rise in oil prices, Russia’s crude oil export revenues had nearly doubled by March 2026.

The crisis period also had a positive impact on Russia’s Ural crude oil pricing. Whilst Ural crude generally traded at a premium or a slight discount to Brent in April and May, it was observed that China and India were actively increasing their purchases of Russian oil to offset the shortfall from Middle Eastern sources. This situation meant export conditions were far more favourable than usual. A key factor behind the significant year-on-year increase in oil and natural gas revenues in May 2026 was the Trump administration’s temporary authorisation of Russian oil purchases as part of its pre-election initiative to lower domestic fuel prices.

However, to understand that these gains are cyclical rather than structural, one must examine the state of Russia’s energy export infrastructure. Russia’s crude oil exports to China and India have become increasingly concentrated since 2024, with both countries together accounting for 83 per cent of Russian crude oil purchases. However, this concentration also brings with it a concentration of risk. This structure—comprising over 600 tankers operated via unidentified companies, known as the ‘shadow fleet’, to circumvent sanctions—accounts for 70 per cent of Russia’s total oil exports. In this context, the fact that the cost of transporting crude oil via the shadow fleet has increased tenfold since 2022 indicates that a significant portion of the revenue generated from high oil prices is being absorbed by logistics costs.

The Islamabad Agreement and Market Reactions

Following the announcement on 14 June 2026 that the 14-point Islamabad Agreement—which envisages an end to the war and the resolution of issues through negotiations, following talks mediated by Pakistan—had been signed, oil markets experienced a sharp decline. The price movement was successive and rapid. On 12 June, Brent crude fell below $90 for the first time since 10 March, closing at $87.33; on 15 June, it fell to $82.24, a loss of 5.8 per cent; on 16 June, it fell below $80 for the first time since 2 March, closing at $78.67; and on 18 June, following the agreement being signed digitally and coming into force, it returned to pre-war levels, closing at $73.87. Thus, the Brent price, which had fluctuated between $75 and $126 over approximately 100 days, fell back to its pre-war level within a single week.

This price movement reflects not only Russia’s losses but also the speed at which the market processes information. This scenario, which tests the validity of the efficient markets hypothesis—which posits that information is reflected in prices instantly and completely—for energy markets, also demonstrates that the geopolitical risk premium can be incorporated into prices at great speed, just as it can be removed from them just as rapidly. Russia has been entirely at the mercy of a variable beyond its control, on both the upward and downward sides of this price dynamic.

A general licence issued in April by the Office of Foreign Assets Control (OFAC), part of the US Department of the Treasury, stated that the sanctions exemption granted for certain transactions involving Russian-origin crude oil and petroleum products would expire on 17 June; however, the Department did not announce a further extension on that date. This silence reinforces the likelihood that the sanctions regime will return to full force once the Middle East crisis comes to an end.

The Anatomy of Structural Vulnerability: The Limits of a War Economy

To properly assess the impact of the Islamabad Agreement on oil markets, it is necessary to examine Russia’s pre-crisis financial picture. This picture clearly reveals that deep-seated and persistent structural problems lie beneath the temporary opportunity.

Russia’s 2026 budget was based on an oil price of $59 per barrel. Whilst the 2026 budget targeted oil and gas revenues of 8.92 trillion roubles, actual revenue for the first five months of the year stood at approximately 3 trillion roubles, a figure that fell short of the January–May 2025 period. In 2025, the federal budget deficit stood at 5.65 trillion roubles, or approximately 2.6 per cent of GDP; oil and gas revenues fell by nearly a quarter, marking Russia’s lowest annual oil and gas revenue since 2020. In January 2026, oil and natural gas revenues fell by 50.1 per cent compared with the same period of the previous year, dropping to approximately 393 billion roubles; the decline was primarily attributed to falling oil prices and the appreciation of the rouble.

To offset this loss of revenue, the Kremlin has resorted to a number of fiscal measures. Russian Finance Minister Siluanov announced that 447 billion roubles (approximately 5.5 billion dollars) would be drawn from the National Welfare Fund in 2025 to close the budget deficit. The Kremlin is also seeking to close the gap created by falling oil revenues and slowing growth through tax increases and domestic borrowing. Whilst fluctuations in oil prices and declining natural gas exports are putting pressure on budget revenues, the appreciation of the rouble is placing an additional burden on exporters; a budget deficit equivalent to 1.6 per cent of GDP is forecast for 2026.

The macroeconomic picture also clearly reflects the bottlenecks in the war economy. The growth cycle, fuelled by public expenditure in the defence industry and rising domestic demand, has entered a period of slowdown due to capacity constraints and the impact of tight monetary policy; the 2025 growth forecast, originally projected at 2.5 per cent, has been revised down to 1 per cent as a result of falling global energy prices and a decline in investment appetite. Analysts at the Bank of Russia, meanwhile, have revised their 2026 GDP growth forecast down from 1 per cent to 0.7 per cent, whilst projecting that the budget deficit will stand at 2.6 per cent of GDP. In its January 2026 World Economic Outlook report, the IMF also lowered its growth forecast for Russia in 2026 from 1 per cent to 0.8 per cent. In this environment, where the policy rate has remained in the 21 per cent range, high interest rates have brought investment to a standstill, particularly in non-defence sectors, and the proportion of loss-making companies has exceeded 30 per cent.

Tangible signs of energy pressure are also emerging in Russia’s domestic market. A particularly striking development is that, even at the height of the Middle East crisis, Russia’s domestic fuel supply faced major problems; major Russian oil companies, led by Tatneft, were forced to impose temporary restrictions on fuel sales in June 2026. The number of regions in Russia subject to fuel restrictions has risen to 16; litre limits have been imposed on petrol and diesel sales in various parts of the country, with the restrictions spreading across western regions whilst also affecting Siberia and the Far East. This development, which reflects partly economic pressure and partly the high priority given to exports, serves as a striking example of just how limited Russia’s domestic prosperity has been, despite benefiting from high oil prices.

The Sanctions Regime and Deepening Dependence on the Asian Market

The fragility of Russia’s oil export system is not limited to price volatility alone. The long-term effects of the sanctions regime constitute a separate layer of vulnerability. The import ban on Russian oil transported by sea and the price cap per barrel, introduced by the G7 and the EU in December 2022, have further squeezed Russia’s export revenues following the cap’s reduction to $47.6 per barrel in July 2025. Under the sanctions, Russia is already forced to sell Ural crude at a discount of approximately $10 per barrel compared to Brent; on top of this, it must cope with the rising financial burden caused by a significant increase in defence spending over the last three years.

The shift towards the Asian market, however, presents itself as both a solution and a new form of dependency. Russia’s crude oil exports to China and India accounted for 30–40 per cent of total exports prior to 2022; this proportion rose to 67.8 per cent in 2022, 77.6 per cent in 2023 and 83 per cent in 2024. The political consequence of this concentration is also clear: Russia has now placed the bulk of its oil exports at the mercy of these two customers. Should China and India occasionally exert price pressure or show reluctance due to Western sanctions, Moscow’s room for manoeuvre becomes extremely limited. Indeed, the volume of bilateral trade between Russia and China fell by approximately 7 per cent in 2025 compared with the previous year, reaching a level of $228 billion; this decline marked the first contraction since 2020, during the pandemic.

The Transience of the Opportunity: Expert Assessments

Expert assessments regarding all these developments are consistent in their view that the opportunity does not pave the way for structural transformation. Ajay Parmar, Director of Oil Markets and Energy Transition at ICIS, emphasised that, had the crisis not occurred, Western countries would not have been able to show the same degree of flexibility in the sanctions imposed on Russia, noting that “for Russia, which is heavily dependent on oil revenues, oil prices remaining at low levels would be highly detrimental”. Kate Dourian, meanwhile, noted that “high prices helped Russia but did not resolve the country’s financial problems; they merely postponed them”, emphasising that as soon as Gulf supply returns to normal, Moscow will lose the advantage it gained from high prices and that the sustainability of this situation is extremely limited.

The general consensus among experts is that whilst Russia has made significant profits from prices above $100 per barrel, fundamental problems such as labour shortages and high interest rates remain unresolved; even if oil prices rise well above the budgeted level, this will not facilitate access to credit or immediately create a skilled workforce. Furthermore, rising oil revenues generally fuel inflation and, by strengthening the rouble, have a negative impact on the non-resource sector. This mechanism can be viewed as a dynamic form of the ‘resource curse’: whilst high oil revenues provide short-term budgetary relief, they constitute a structural barrier to economic diversification in the medium term.

Conclusion: From a Postponed Collapse to a Managed Decline

The Islamabad Agreement and the subsequent normalisation of oil prices have perhaps laid bare, in its most stark form, the war economy model that Russia has been sustaining through its energy revenues. To correctly assess Russia’s current position, both extreme theses must be set aside: neither is Moscow, as some Western analysts have predicted, on the brink of imminent economic collapse; nor is it, as the Kremlin claims, developing genuine resilience against sanctions. By mid-2026, Russia’s economy cannot be described as either a completely collapsed economy or a healthy major-power economy; high interest rates are stifling investment, the burden of defence spending is increasing, civilian sectors are struggling to find skilled labour, and as energy revenues fluctuate, fiscal space is steadily narrowing.

Russia’s performance over the past four years suggests a shift from a ‘postponed collapse’ to a ‘managed decline’. Each new geopolitical situation affords Moscow a temporary respite; yet every period of adverse prices re-exposes the structural damage. It appears that the temporary increase in revenue derived from the Middle East crisis will not be sufficient to offset Russia’s sharp decline in oil and gas revenues in 2025 or the annual revenue drop exceeding 50 per cent expected in early 2026. Moreover, the sanctions regime is expected to be reimposed within an increasingly stringent framework as Gulf supply normalises.

From the perspective of energy security theory, this process reaffirms once again that structural dependence on energy revenues is both a source of strength and an Achilles’ heel for a state. The Russian example concretely demonstrates that energy wealth can only be transformed into a sustainable strategic advantage when combined with institutional diversification, investment in technology and a sound monetary anchor; when relied upon solely as a matter of price fortune, it amounts to nothing more than accepting vulnerability to external shocks. The price shock caused by the Islamabad Agreement has reminded Moscow of this reality once again, and in a very severe manner.