Putin’s oil war with the West comes at his allies’ expense

As Russia pushes to find new buyers for its oil to skirt ever tougher Western sanctions, it is cutting into the market share of two of its allies — Iran and Venezuela — and setting off a price war that could hurt them all.
The competition for sales to Asia has already forced Venezuela and Iran to sharply discount their crude to try to hang onto the few available outlets for their own sanctioned exports, according to oil analysts and traders.
And although both Iran and Venezuela profess publicly to remain close to Russia, experts expect that if the oil battle intensifies it will raise tensions with the Kremlin even as its leader, Vladimir Putin, works to shore up his alliances. On Tuesday, his government announced he would make a rare trip outside the country next week to Iran’s capital, Tehran.
The oil competition set off Russia’s invasion of Ukraine already appears to be pushing Venezuela a bit closer to the West, after years of a deep freeze in relations over electoral and human rights abuses the country’s authoritarian leader. The last remaining American oil producer there, Chevron, has been in talks with the Venezuelan government, according to a Venezuelan oil executive and a local official.
Any possible deal to bring more Venezuelan crude onto world markets would help the United States, which is increasingly desperate to reduce oil prices to limit the damage to Western economies from the war and from sanctions imposed on Russian oil. The economic fallout is whittling away at support for Ukraine in its struggle against its larger neighbor.
“The war shows that countries have interests, not enemies or friends,” said Francisco Monaldi, a Venezuelan oil politics expert at Rice University.
Drivers fill their gas tanks at a Sunoco gas station in Sloatsburg, N.Y. on May 26, 2022. Russia’s use of energy as weapon in its standoff with the West is redrawing the geopolitical map, causing tensions with old allies but opening new partnerships. (An Rong Xu/The New York Times)
The spike in energy prices has given fossil fuels a prominence they last enjoyed in the 1970s, amplifying the effect of the Kremlin’s policies far beyond the battlefields at a time when many world leaders had hoped to begin phasing out oil to tame climate change.
Daniel Yergin, a prominent energy expert and the author of “The New Map: Energy, Climate, and the Clash of Nations,” said the energy crisis was unraveling the last vestiges of the post-Cold War global economy, heralding a new era of great power competition in an increasingly fragmented world.
“Oil and natural gas,” he said, “have become central to the outcome of this new struggle.”
The resurgence of oil and gas — and the fact that so much of global supply comes from Russia — has been Putin’s strongest weapon against the West, giving him a geopolitical clout far beyond his country’s position as the world’s 11th largest economy.
It didn’t look that way earlier in the war, when the United States began to nudge allies to punish Russia, leading to the promise of an oil embargo Europe. The hope was that cutting Moscow from that market would help starve it of the revenue to wage its war.
Instead, the price of oil shot up, reaching levels not seen since 2008. Russia’s oil revenues increased and have continued to feed its war machine.

As Russia began to lose its Western markets, China and India agreed to buy more of its oil, at a discount, despite initial pleas from the United States.
The Biden adminration is currently trying again to outmaneuver Russia. Despite chilly relations, President Joe Biden is traveling this week to Saudi Arabia, the Persian Gulf state that the West wants to pump out more oil so oil prices will drop. And U.S. officials have proposed a plan meant to cap the price of Russia’s oil.
For now, Russia has won at least a short-term battle with the West over oil revenues. But it could come at a geopolitical price if Iran and Venezuela feel too much economic pain. Both countries have long been allies of Russia, one of the few countries to offer them economic help when much of the world turned away.
Venezuela and Iran treat oil-related statics as a state secret, so it is difficult to tell whether revenue is dropping, or if the loss of market share is being made up higher benchmark prices for the crude that is sold. But the volume of Iran’s exports are dropping, according to a trader and an analyst, preventing the country from reaping the benefits from the spike in energy prices.
People walk in Nur Sultan, Kazakhstan, on Jan. 18, 2022. Russia’s use of energy as weapon in its standoff with the West is redrawing the geopolitical map, causing tensions with old allies but opening new partnerships. (Sergey Ponomarev/The New York Times)
The discounts offered Venezuela’s state oil company, known as PDVSA, to Chinese refiners reached record highs since the invasion of Ukraine, according to Venezuelan energy experts and oil executives. A barrel of the country’s flagship type of crude, known as Merey, currently sells in Asia for up to $45 less than Brent, a crude that is used to set global oil prices and currently trades at about $100 a barrel.
Before the war, the discount was about half what it is now, according to the Venezuelan oil executive, who asked for anonymity to speak about a sensitive subject.
Worse, since the start of the war Russian shipping firms have stopped paying PDVSA for the crude they sell on its behalf in Asia, depriving the country of a crucial source of income, according to the executive, who is familiar with the arrangement. Last year, that scheme earned the Venezuelan government $1.5 billion, representing a quarter of all state oil revenues.
“Sanctioned Russia is struggling to be a reliable ally to Venezuela,” said Risa Grais-Targow, a Latin America analyst at the risk consultancy Eurasia Group. “The economic relationship that has been there for some time is fraying.”
Iran is facing similar problems, said Sara Vakhshouri, an oil expert at the Middle East-focused consultancy SBV Energy International.
She said the Chinese government has prioritized Russian imports partly because it has closer strategic ties to its northern neighbor.
In the first two months of the Iranian lunar year, which started in late March, the country earned only 37% of its projected revenues for the period, according to figures from Iran’s Supreme Audit Center.
An Iranian oil trader, who spoke on condition of anonymity because of the sensitivity of the topic, said Russian competition has cut Iran’s oil exports to China more than a third of its prewar levels.
The trader said Iran’s exports to Asia have fallen to an estimated 700,000 barrels per day, half of the export volumes on which the country based its annual budget.
“Iran is at a major economic and political disadvantage in the post-Ukraine war environment,” said Alireza Haghighi, a Canada-based political analyst.
Other Kremlin allies have felt the sting of Russia’s use of energy as leverage. Last week a Moscow court unexpectedly ordered a one-month shutdown of a crucial pipeline that transports oil from Kazakhstan through Russia, citing environmental violations. The court order, since reversed, appeared to be a warning to Kazakhstan’s president, Kassym-Jomart Tokayev, who has danced himself from the Kremlin’s war narrative, saying he would not recognize the Russian-backed separat territories in Ukraine.
The court’s original action sent a strong signal to the energy market and Kazakhstan’s government about the power that Putin wields over the global oil supply, and the economic fortunes of his wavering ally, said George Voloshin, a Paris-based expert at the risk consultancy Aperio Intelligence.
Despite growing economic competition, both Iran and Venezuela have maintained a show of public solidarity with Putin. In frequent personal meetings since the start of the war, top Kremlin officials and their Iranian and Venezuelan counterparts have vowed to close ranks to overcome American sanctions.
But, paradoxically, the energy price spike may be moving the interests of Venezuela and Iran closer to the West.