How Ukraine set Russia’s biggest economic asset on fire

As Vladimir Putin held meetings with Russian police chiefs earlier this month to discuss tightening migration controls in the wake of the Moscow concert hall terror attack, foes were crossing his country’s border hundreds of miles away.

A Ukrainian drone flew over the frontlines on April 2 and travelled 800 miles into Russia’s Tatarstan region before hitting the country’s third largest oil refinery, sending it up in a cloud of flames.

After struggling to make headway against Putin’s war machine on the battlefield, Ukraine has adopted a new tactic – target Russian fuel. The Tatarstan attack was one of more than a dozen on refineries since the start of the year.

The assaults have left 16pc of Russia’s total refining capacity offline at the end of March, according to S&P Global Commodity Insights. This equates to a million lost barrels of refined product each day – ranging from jet fuel to diesel and petrol.

A loss of refinery capacity is a problem for Putin: not only does it reduce fuel for his war machine, it leaves him with less product to export to countries such as India and China that still trade freely with Russia. That poses a threat to the Kremlin’s revenues.

Compounding this headache is the fear that attacks could drive up pump prices for ordinary Russians, a scenario that could threaten social unrest.

“Some people are saying that the numbers we’ve seen so far just aren’t enough for Russia to really feel the pain,” says Craig Kennedy, associate at Harvard’s Davis Center for Russian and Eurasian Studies. “That’s true today but if it continues at this rate, sooner or later, it will feel pain.”

However, Kyiv is walking a tightrope. By threatening the supply of Russia oil, which still finds a way into the global marketplace, Ukraine could drive up the price of crude. That is not something allies in Washington, Brussels or Westminster want.

Putin is clearly concerned about the prospect of fuel shortages and is scrambling to shore up supplies.

The Kremlin launched a six month ban on petrol exports outside the Eurasian economic union on March 1. It is rapidly scaling up imports of gasoline from Belarus, which rose from nothing in January to 3,000 tons in the first half of March. Reuters last week reported that Putin is brokering a deal with Kazakhstan to ensure it is ready to supply 100,000 tons of petrol in case of shortages.

“The Russian public is very sensitive to gasoline prices, so much so that the Russian government shields them from the international price, which is much higher,” says Kennedy. “Cheap gasoline is subsidised domestically to keep people happy.

“If suddenly there is a shortage of gasoline, the upward pressure on prices is going to be big and that could fuel social discontent.”

Drivers in Moscow say they have not seen rises in pump prices yet but regional publications, such as NGS70.ru and 56orb.ru, have been discussing the prospect of increases.

“Temporary shortages of petrol are possible if there were simultaneous Ukrainian drone and missile strikes on multiple refineries,” says Tatiana Orlova, lead economist for emerging markets at Oxford Economics.

Ukraine hit a Russian factory with a remote-controlled Cessna-style plane packed with explosives

Ukrainian drone strikes are hitting just as Russian refineries are grappling with other problems. Many are made with Western parts, which were necessary to meet requirements for export to the European market before the war. Now, sanctions are blocking maintenance works, says Kennedy. Major floods also forced the Orsk refinery in the Urals to suspend production last week.

Extra imports from allies such as Kazakhstan and Belarus will be expensive and are unlikely to fill the gap, says Kennedy. “Their production capacities are much smaller than Russia’s so they’re not going to be able to cover all of the shortfall if there is a widening campaign.”

Russia currently has capacity to refine about five million barrels a day of oil products and roughly half is consumed domestically.

Oil and gas form the bedrock of Russia’s economy. The sector contributed 42pc of Russia’s federal budget revenues in 2022, according to an analysis by Vitaly Yermakov at the Oxford Institute for Energy Studies.

Falling energy prices and Western sanctions brought this share down to 32pc in 2023, but this was still worth a total of $108bn.

Now, refinery strikes threaten to shrink that figure even further. If Russia cannot refine its oil, it will have a glut of crude for export. India is the only country that can realistically handle it.

“That’s where the remaining large-scale demand is for Russian crude and that means [India] is going to be in a situation to push for a deeper price discount,” says Kennedy.

An open question is how much further Ukraine will go in its attacks.

“Is this the starting point, or the end point of this energy infrastructure war?,” says Helima Croft, head of global commodity strategy at RBC Capital Markets. “Because it could be much more disruptive and painful for Russia.”

Roughly three-quarters of Russia’s refinery output is within range of Ukrainian drones and missiles.

More than 60pc of Russia’s oil exports are within range of Ukrainian missiles, should Kyiv choose to step up its attacks.

“How far is Ukraine willing to go in their efforts to close the Russian energy ATM?,” says Croft. “They haven’t yet gone after the real cash cow for Russia.”

Ukraine is walking a geopolitical tightrope. The price of Brent crude has already surged by more than 10pc since the start of the year and is now hovering close to $90 per barrel. If the attacks escalate, prices could rise even higher.

“Markets are waking up to the fact that we could see more disruption out of Russia and a potential expansion to this war in the Middle East involving Iran,” says Croft. “I think that there’s certainly a path to $100 now.”

The West has introduced large-scale sanctions against Russia since the war began, but it has structured them so that Russian oil and gas exports can continue worldwide to stop huge surges in commodity prices.

Senior officials at Ukraine’s state security service have received repeated calls from the US government to stop attacking refineries, according to the Financial Times.

Will Kyiv listen? A $60bn military aid deal for Ukraine is held up in Congress. Russia is making battlefield advances. The prospect of a Trump presidency, which could end US support altogether, is looming large.

“[Ukraine] is saying ‘look, if you don’t give us the weapons and the money, why should we honour a bargain that essentially says that Russian energy is a safe zone?’,” says Croft.

If Kyiv decides not to honour the deal, Russia risks running on fumes.