Kremlin’s Move Toward Full State Control of Oil and Gas Assets
Since Russia’s invasion of Ukraine, President Putin’s administration has been constantly tightening control over the financial flows from the country’s oil and gas sector. With the sharp decline in Gazprom’s gas exports, oil revenues have become the primary source for balancing the national budget and funding the war effort. As a result, Russia’s dependency on oil exports has risen considerably.
OPEC+ Solidarity at Risk
Recent developments in OPEC+ have added challenges for Russia. Reports suggested that Saudi Arabia’s energy minister hinted oil prices could fall to $50 per barrel, reflecting tensions within OPEC+ over quota compliance. Although these claims were later denied by OPEC, OPEC+’s market share has declined from 55-60% in 2020 to 50-55% in 2024, forcing Russia to secure its share in the global oil market. The rise of non-OPEC producers, particularly the United States, has further pressured OPEC+’s oil revenue.
Global Oil Price Projections for 2025
Several investment banks have revised their projections for 2025 crude oil prices downward. JP Morgan and Morgan Stenley forecast Brent crude at $74 per barrel, while WTI crude is expected to hover around $70 per barrel. Most cite increased supply and sluggish demand, particularly from China and other OECD countries.
Forecast for Russian Crude
Due to geopolitical tensions and sanctions, Russian crude prices are likely to stay significantly below global benchmarks. Currently, Russian Urals crude trades at a substantial discount to Brent, largely due to sanctions and the reliance on “shadow fleets” for exports. For 2025, Russia’s Central bank expects Urals to be traded 20-30% below Brent, translating to prices between $50 and $60 per barrel, depending on market dynamics and demand fluctuations.
Russia’s crude oil exports currently average 4.5 million barrels per day (bpd) in 2024, consistent with 2023 levels. However, export volumes could decline in 2025 under the pressure of international sanctions and efforts by Saudi Arabia and other major producers to gain a larger market share.
Economic Risks and Stagflation Concerns
Russia’s financial experts, including Central Bank head Elvira Nabiullina, have raised alarms about stagflation—the combination of rising inflation and slow growth—affecting the 2025 budget. Although the militarization of the economy has temporarily boosted activity, it has widened social and economic inequalities, posing a medium-term risk to Putin’s leadership.
With the collapse of Gazprom’s European sales, revenues from crude oil and refined products have become the central financial pillar of Russia’s economy. This reliance is critical given the anticipated 23% rise in defense spending in the 2025 budget. At the same time, Russia’s oil and gas export revenues have dropped from 45% in 2023 to 35% in 2024, further compounding the need for the Kremlin to secure control over these vital assets.
Fear of Soviet-Era Collapse
Putin’s greatest fear is a repeat of the late Cold War, when oil prices fell to $12 per barrel (1986), which along with the arms race spending, contributed to the collapse of the Soviet Union. To prevent a similar downfall, Putin is focused on consolidating state control over Russia’s oil and gas assets, aiming to shield the sector from external shocks and revenue shortfalls that could destabilize his regime.
Kremlin’s Growing Nationalization Strategy in the Energy Sector
Russia’s move toward further nationalization of its fuel and energy sectors aligns closely with President Putin’s long-term strategy of consolidating power, a hallmark of his presidency over the past 24 years. This strategy, initiated under the guise of “strengthening sovereignty,” has systematically increased state control over the nation’s critical resources.
One of Putin’s earliest actions after coming to power was the decision to block access to resources through Production Sharing Contracts (PSCs), which are international treaties that supersede national law. Instead, Russia transitioned to an all-licensing regime, enabling the state to revoke licenses at any time for any reason, giving the government total leverage over the extraction and distribution of resources.
Following this, Putin ensured full control over energy transportation, establishing Gazprom’s monopoly on gas transport and exports via pipeline by 2008. Similarly, Transneft was given monopoly control over oil pipelines, with the exception of the Caspian Pipeline Consortium (CPC), which remained an outlier. Over time, the Kremlin also manipulated taxes and resource royalties from oil and gas producers, further solidifying state control.
Recent Nationalization Moves: Lukoil in Focus
In recent years, Putin has approved the nationalization of several Russian companies, particularly those formerly owned by foreign investors who fled the Russian market after the invasion of Ukraine. For a long time, Rosneft’s CEO, Igor Sechin, advocated for the nationalization of Lukoil, one of Russia’s largest private energy companies. However, Vagit Alekperov, Lukoil’s majority owner, resisted these pressures. Alekperov successfully positioned Lukoil as a “purely” commercial entity, arguing that its private ownership was crucial for avoiding international sanctions and protecting its assets abroad. This reasoning resonated with the Kremlin, which saw the strategic advantage of keeping Lukoil’s international influence intact.
However, as economic pressures mount from financing the war in Ukraine, Putin seems increasingly inclined to surround himself with family members and loyalists. In a recent development, he appointed Sergei Tsivilyov, the husband of his niece Anna Tsivilyova, as Russia’s new energy minister. This move aligns with his strategy of consolidating control over critical sectors of the economy.
Recent Discussions on Nationalization
On October 1, Putin met with Tsivilyov and Deputy Prime Minister Alexander Novak to discuss preparations for the upcoming heating season and to ensure the energy system’s readiness during wartime. However, various sources claim that the true focus of the meeting was to discuss the potential nationalization of Russia’s fuel and energy sector, with the aim of creating a state-owned mega-corporation incorporating Lukoil, Rosneft, and Rosneftegaz. This move would likely mark the end of Lukoil’s private ownership.
The Distinction Between Lukoil and Rosneft
The differences between Lukoil and Rosneft, Russia’s two largest oil companies, are stark, particularly in the way they operate internationally and their relationship with the Kremlin. Rosneft, as a state-owned enterprise, has historically been a tool for advancing the Russian government’s geopolitical objectives. By contrast, Lukoil—Russia’s largest privately-owned oil company—has positioned itself as a commercial entity, focusing on business goals rather than political agendas, a narrative it emphasized to the West.
Lukoil’s foreign assets in the West are far more diverse than those of Rosneft. The company has a significant presence in both upstream operations (exploration and production) and midstream activities (refining, trading, and distribution) all over the world. Lukoil’s European operations include refineries in Italy, Romania, and Bulgaria, along with fuel stations in countries like the United States. In contrast, Rosneft’s sole notable European asset has been the Schwedt refinery in Germany, but management control has been taken over by the German government. Lukoil’s widespread involvement in the European energy market helped it maintain an image of relative independence from Kremlin influence.
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Putin’s Waning Interest in Lukoil’s Private Ownership
Amid rising tensions with the West, President Putin seems to be losing interest in maintaining Lukoil’s private status, particularly as its European operations face increasing pressure. The near-forced sale of Lukoil’s ISAB refinery in Italy, combined with ongoing attempts to sell the Petrotel refinery in Romania and Neftohim in Bulgaria, have weakened arguments for keeping Lukoil formally out of state control.
Speculation suggests that Putin’s recent meetings with Deputy Prime Minister Alexander Novak and Energy Minister Sergei Tsivilyov may have focused on de-privatizing Russia’s energy sector. The goal could be to consolidate Lukoil, Rosneft, and Rosneftegaz into a state-controlled oil giant. If these plans were made public, they could negatively affect Lukoil’s ability to operate in Europe and complicate Rosneft’s ongoing legal battles in Germany.
Consequences of Nationalization and Sanctions
Should Lukoil be nationalized and merged with Rosneft and Rosneftegaz, the resulting mega-corporation would almost certainly be hit by comprehensive international sanctions. These sanctions would likely lead to a fire sale of Lukoil’s European assets, forcing the company to sell to “friendly” buyers and ultimately shut down its operations in Europe and the U.S. This move would further isolate Russia’s oil industry globally, leaving the country’s energy sector more dependent on non-Western markets and worsening its financial and operational challenges. Additionally, Lukoil’s foreign operations have reportedly served as convenient covers for Russia’s intelligence activities, which would also be impacted by this nationalization.
In the context of increasing defense spending and declining oil revenues, Putin’s interest in nationalizing Lukoil reflects a broader trend of consolidating state power over vital economic sectors as the Kremlin faces mounting internal and external pressures.
Ilian Vassilev
