We start again with global events, as the Middle East conflict continues unabated and impacts all market aspects. The US and Israel failed to achieve a quick Blitzkrieg victory. As expected, this led to the Strait of Hormuz being blocked. In reality, the strait is not mined, but passage is impossible—Iran targets all approaching ships. Traffic through the strait is minimal.
As a result, countries dependent on it (Saudi Arabia, Iraq, UAE, Kuwait) have accumulated massive oil reserves that cannot be shipped out. Production is therefore declining rapidly.
Currently, this involves about 7 million barrels per day, roughly 7% of global demand—a significant figure. In March, Brent surged more than 40%.
What are the consequences of such restrictions
- Rising gasoline prices in the US and Europe. This will 100% accelerate inflation without economic growth.
- Developed countries will almost certainly face stagflation—rising prices without GDP growth.
- Interest rates question. The Fed meeting is today. The chance of a rate cut is nearly zero. But remember, Jerome Powell steps down in May, replaced by Trump’s appointee Warsh. Future monetary policy decisions remain shrouded in mystery.
- Increased demand for substitute goods. Higher oil prices push countries to seek alternatives. Climate change concerns are sidelined—coal prices have spiked. Fertilizer prices have also risen, as a large volume passes through the strait (smart move if you hold PhosAgro in your portfolio).
In the long term, the world faces stagflation and economic slowdown, leading to reduced oil demand (balancing the situation). Ultimately, oil prices will fall.
How the situation benefits Russia
Two key nuances here regarding this window of opportunity:
External track
There is potential for quicker conflict resolution, as prolonged issues with Iran may make the US (and European) side more conciliatory. But that’s up to diplomats to negotiate.
Internal situation
The Finance Ministry released budget figures last week: the situation is not great. January-February deficit is 3.449 trillion rubles against a planned 3.786 trillion for the whole year. This means we’ve already hit 90% of the plan in two months, sparking talks of sequestration—cutting expenditures.
The Iran conflict offers short-term balancing opportunities—March oil and gas revenues will clearly exceed January and February.
However, the Central Bank’s next steps remain uncertain. Its meeting is this Friday, with a high chance of cutting the rate by 50 basis points to 15%. Budget sequestration (if it happens, still just rumors) is disinflationary, potentially accelerating rate cuts. As a result, the USDRUB rate is rising—now at 81.
The MOEX Index has also climbed and holds at 2870 points. Recall that breaking 2850 signals a medium-term trend shift. But is it sustainable? The index is buoyed solely by oil. Thus, its strength is questionable.
