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Wagner vs. Putin: As Russia Descends Into Civil War the World Braces for an Oil Price Shock

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by admin June 24, 2023

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The Russian state is facing its most severe internal challenge in well over two decades, spurred by the supposed grievances of the Wagner Group vis-à-vis Putin’s Ukraine offensive, with potent ramifications for the ongoing transition to a multipolar world order as well as the oil markets and the attendant resurging risks of the inflation conflagration.

The seeds of this crisis have been visible for months, with Yevgeny Prigozhin, the head of the Wagner Group – the largest private army in Russia and an instrumental force in the country’s war against Ukraine – repeatedly expressing frustration with Russia’s approach in Ukraine. Prigozhin has accused the Russian defense minister, Sergei Shoigu, as well as the country’s top general, Valery Gerasimov, of gross incompetence in the Ukraine offensive while deliberately withholding any direct blame on Putin.

However, things presumably reached a boiling point on Friday when Prigozhin said in a video clip that was released on Telegram:

“The defense ministry is trying to deceive society and the president and tell us a story about how there was crazy aggression from Ukraine and that they were planning to attack us with the whole of NATO.”

He said that the war was started for “different reasons,” going on to note:

“The war was needed … so that Shoigu could become a marshal, … so that he could get a second ‘Hero’ [of Russia] medal. The war wasn’t needed to demilitarise or denazify Ukraine.”

As has been the case with previous allegations from Prigozhin, Moscow was quick to reject such assertions. Nonetheless, Prigozhin announced a “march of justice,” vowing to punish Shoigu for his crimes and urging the Russian military not to interfere.

Putin then addressed the nation, terming Prigozhin’s campaign as “criminal” in nature and equating it to an armed mutiny.

Meanwhile, there are reports that the Wagner Group is now receiving assistance from the Southern Military District, which contributes around a quarter of the country’s military personnel.

Moscow is apparently now bombing oil depots in the Voronezh region to slow down the Wagner Group’s march on Moscow. There are unconfirmed reports that Putin has fled to Saint Petersburg.

At the time of publication, the convoys of the Wagner Group were advancing into Russia’s Lipetsk region and remained just around two hours away from Moscow.

Implications of Russia's Civil War: The Oil Market is the Immediate Casualty, With Debilitating Ramifications for a Multipolar World Order

OPEC Plus – a grouping that includes traditional OPEC members as well as Russia – has implemented two output cuts since October 2022. However, given the specter of a recession in the US, along with anemic economic growth in the EU and China, oil prices have remained subdued.

Frustrated by these dynamics, Saudi Arabia vowed in early June to cut its oil output by a whopping 1 million barrels in July, with the possibility of extending this cut for additional months if needed. The agreement reached in June extended the group’s already-agreed production cuts through 2024 while also including a cut of around 500,000 barrels that Russia had assented to back in February. However, OPEC members, including the UAE, have continued to express concerns that Russia’s numbers did not add up, given the country’s increased market share in India and other key Asian economies.

Despite the extension of OPEC Plus production cuts, the EIA still expects global oil production to grow by 1.5 million barrels per day (bpd) in 2023 and by 1.3 million bpd in 2024, primarily due to increased contributions from non-OPEC sources, including the US.

As per OPEC’s sources, Russia’s crude oil production in May stood at 9.533 million bpd. China and India are believed to have imported 110 million barrels from Russia in May, accounting for a whopping 38 percent of the country’s total crude production for the month.

According to the EIA, Russia’s exports of crude and refined oil in April edged up to a post-invasion high of 8.3 million bpd, earning around $15 billion in the process. For the entire 2023, the EIA expects world demand to average 102 million bpd.

As a result of the ongoing civil war, there remains a material probability that Russia might lose its ability to export oil, creating an immediate deficit of around 8 percent of the expected global oil demand for 2023. Should this catastrophic scenario materialize, oil will most likely jump to between $150 and $200 per barrel, creating a renewed global inflation conflagration. Even if Russia manages to maintain some of its onshore exports via pipelines, the impact on the oil market will still be material. Of course, much still depends on Moscow’s ability – or lack thereof – to control this situation.

As far as geopolitics is concerned, Ukraine is likely to emerge as the biggest winner, while China would be the biggest loser. Bear in mind that the Russia-China nexus was pivotal in driving momentum toward a multipolar world order. This situation would also strengthen Taiwan’s hand in challenging China’s moves much more aggressively. Russia’s weakness also deals a blow to Iran and Syria. In another interesting twist, it remains to be seen how Saudi Arabia would pivot in light of these evolving events. After all, the desert kingdom has been ramping up its cooperation with Russia and China in recent months.

Where do you think the world is headed as Russia descends into civil war? Let us know your thoughts in the comments section below.

Written by Rohail Saleem

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