Russia–Ukraine peace, oil prices, and risks to Iraq’s economy

Shafaq News

As negotiations between Russia and Ukraine gain momentum, global energy markets are reassessing supply expectations, raising concerns for oil-dependent economies such as Iraq over the fiscal impact of lower prices.

For Baghdad, the effect is not straightforward. Analysts point to near-term risks driven by higher supply and falling prices, alongside a medium-term scenario in which stronger global growth could lift demand and ease pressure. How these forces interact will shape Iraq’s fiscal outlook.

Markets have reacted cautiously to the prospect of a settlement, amid expectations that easing sanctions could allow Russia to rapidly increase exports and add millions of barrels per day to global supply. Reuters has reported that Russia holds significant spare export capacity that could return quickly if restrictions ease, intensifying oversupply concerns.

Oil prices have already weakened. Brent crude, which traded above $80 per barrel in September 2024, slipped below $60 by December 2025, reflecting subdued demand growth and rising supply expectations.

Iraq’s exposure is reinforced by the April 2025 Article IV consultation of the International Monetary Fund (IMF) which estimated that Iraq requires oil prices above $92 per barrel to balance its 2025 budget. According to the World Bank, oil accounts for more than 85% of government revenue, with official Iraqi data showing the figure can reach 95% in some years, while oil represents over 99% of exports.

By comparison, Gulf producers such as Saudi Arabia and the UAE have reduced oil reliance to roughly 40–65% of state income through diversification into industry, services, and sovereign investment returns, giving them fiscal buffers Iraq largely lacks.

Spending rigidity further heightens the risk as Iraqi data show that 4.55 million public-sector employees, 2.6 million retirees, and 2.15 million social welfare beneficiaries receive more than 8.5 trillion dinars ($6.5 billion) per month in fixed payments, sharply limiting the government’s ability to absorb revenue shocks.

Economic and financial expert Hilal Al-Taan told Shafaq News that oil prices respond to a complex mix of global growth, geopolitics, and market sentiment, not peace alone. Still, he warned that Iraq’s dependence magnifies any downturn.

“Iraq is already facing a financial crisis, and any further decline in oil prices will intensify its effects,” Al-Taan said, cautioning that Baghdad could be pushed toward internal and external borrowing, a “dangerous stage for an economy exhausted by repeated financial shocks.”

Oil expert Hamza Al-Jawahiri argued that a peace deal would likely deepen oversupply pressures. Russia, he said, is already exporting under sanctions and could quickly raise volumes if restrictions ease. “Higher US shale output could further increase supply, pushing prices toward $50 per barrel or lower.”

Iraq, however, cannot easily offset price declines by increasing exports. Its production remains constrained by OPEC+ quotas, limiting output even during revenue downturns, a restriction highlighted repeatedly in OPEC market assessments.

Read more: Stable but not secure: The fragile reality of Iraq’s economy

Economist Mohammed Al-Hasani warned that a ceasefire could weigh on prices and curb investment spending. He pointed to Iraq’s experience during the COVID-19 oil crash, when prices briefly fell to $14 per barrel, forcing heavy borrowing to cover operating expenses.

“Despite the collapse, salaries were not cut,” Al-Hasani told Shafaq News, suggesting that borrowing could again become the primary response if prices fall, adding to long-term fiscal risks.

Not all assessments are pessimistic. Mudhir Mohammed Salih, financial advisor to the Prime Minister, argued that peace could ultimately support oil prices by stimulating global growth.

“Peace belongs to the political economy of growth,” Salih told Shafaq News. “If global growth rises by 1%, oil demand typically increases by about 0.7%.”

He said stronger demand could absorb additional supply over time, challenging the assumption that a settlement would automatically harm oil exporters.

Against this backdrop, Iraq has begun preparing its 2026 federal budget using a conservative oil price assumption of $60 per barrel, aiming to restrain spending and protect core obligations.

Following a December 15, 2025 meeting chaired by Prime Minister Mohammed Shia Al-Sudani, the Ministerial Council for the Economy approved measures to curb spending and boost revenues, including cuts to allocations for the three presidencies and reduced official travel allowances.

Salih said such steps remain insufficient on their own. Avoiding recurring salary crises, he argued, “requires structural reform, including revenue diversification and improved spending efficiency—goals outlined in the government program approved by parliament in October 2022.”

Iraq’s vulnerability is most acute in the short term, when supply-driven price declines would immediately strain the budget. Medium-term outcomes depend on whether global growth accelerates enough to lift energy demand. Without diversification, however, Iraq remains structurally exposed regardless of how the Russia–Ukraine conflict concludes.

Written and edited by Shafaq News staff.