Ukraine has 'hit the nail on the head' with strikes on Russian oil industry, economist says

Overnight on Thursday, Ukraine struck one of Russia’s largest oil refineries and petrochemical plants in the Bashkortostan Republic, 1,300 kilometres from the front line in Ukraine.

In a separate parallel attack, the Ukrainian Special Operations Forces also reported a strike against an oil refinery in Russia’s Volgograd region.

The Volgograd refinery, about 450 km from the front, plays a key role in supplying fuel to the Russian military, Ukraine’s Special Operations Forces said.

It is the largest producer of petroleum products in Russia’s Southern Federal District and processes 15.7 million metric tons of crude oil annually, accounting for 5.6% of the country’s total refining capacity.

Ukraine has intensified precision strikes on Russia’s oil industry over the past weeks, forcing operational suspension and even triggering a nationwide fuel shortage.

Ukrainian attacks have shut down facilities accounting for at least 17% of Russia's oil processing capacity, or 1.1 million barrels per day (bpd), according to Reuters' calculations.

Russian economist Vladislav Inozemtsev told Euronews that Kyiv’s strategy to hit the Russian oil industry is “the most efficient thing Ukraine can do” to hurt Russia’s war machine.

Fuel for Russia's war machine

The Russian government relies heavily on oil and gas revenue. Oil exports constitute about one-third of Russia's federal budget, making them a critical source of funding for the war in Ukraine.

Targeting Moscow's oil infrastructure was a logical next step for Kyiv, in what Ukrainian President Volodymyr Zelenskyy said was “the sanctions that work the fastest”.

Inozemtsev explained to Euronews that targeting oil refineries has a significantly bigger impact than targeting, for example, drone manufacturing sites.

According to Inozemtsev, it does not take much time to set up or repair a drone factory, which is not much more than “a large assembly shop where components are delivered, assembled, checked and tested.”

“Let’s say a drone attacks a factory like this – it would take three days to rebuild everything. But if you hit an oil refinery  - the consequences are much more serious, it would burn for weeks," he told Euronews.

In turn, oil refinery equipment is not only costly, Inozemtsev said, but also almost irreplaceable, given that Moscow is under significant Western sanctions.

“In fact, it is European and American equipment. It is difficult to replace it with Chinese equipment," he explained.

Attacks on the big oil refineries cause a significant drop in production, including petrol.

“A 10% drop in petrol production is clearly a deficit for the economy as a whole, while a 30% drop in diesel is nothing at all," Inozemtsev pointed out.

"And the situation with petrol is noticeable. Everyone is talking about problems with petrol. And this is true, it exists, and Ukrainians have created it.”

Gas stations have run dry in more regions of the country, with motorists waiting in long lines and officials resorting to rationing or cutting off sales altogether. The shortage has also been spreading to central regions of Russia as fuel prices hit record highs.

“Ukrainians have hit the nail on the head here," Inozemtsev emphasised.

The problem exists, and prices will rise. Supply disruptions are painful because car ownership is high, and practically everyone has a car."

"So when people see that there is nothing at the petrol station, this is one of the three most important irritating factors, in my opinion: lack of petrol, airport closures, and internet disruptions. These are three things that all Russians feel.”

Can Moscow fix it?

Russia remains the world’s second-largest oil exporter, but a seasonal rise in demand and sustained Ukrainian drone strikes have caused major trouble to its oil industry.

In order to ease the shortage, Russia has paused gasoline exports. A full ban has been declared until 30 September, and a partial ban affecting traders and intermediaries until 31 October.

Inozemtsev explained that, to find a more long-term solution, there is already a lot of talk about “the need to create a missile defence system, anti-drone protection around these enterprises, and so on, which would be very expensive.”

In other words, he said, resources will be diverted from the economy for this purpose.

Oil and gas revenues have accounted for between a third and a half of Russia's total federal budget proceeds over the past decade, making the sector the most critical source of financing for the government.

To tackle the current situation, the Russian government is reportedly considering raising the value-added tax (VAT) rate to keep the budget deficit under control and preserve its reserve.

Inozemtsev pointed out to Euronews that the Russian economy is being hit, but the Russian army and Russia’s war remain intact at this stage.

'Putin wants to press on'

Russia's economy has continued to grow despite tightening Western sanctions over Moscow’s war in Ukraine.

But GDP is expected to slow to around 1% from 4.3% last year, and inflation remains above 8% in a country where much of the workforce and 40% of revenues now go to defence and security.

“In principle, this is how we enter a state where, most likely, we will have zero growth in the coming years, but at the same time, there will always be enough for war,” Inozemtsev told Euronews, adding that Ukrainian strikes on the Russian oil industry have a more profound effect.

“If, let’s say, there is some kind of missile hit on - this, in general, only concerns the inhabitants of Voronezh," he explained.

"But Ukrainian strikes are now already happening all over the country. It makes people understand that things are not going ok and that the government cannot do anything about it.”

“Therefore, I believe that yes, there will be an effect. It will lead to an increase in transport costs and it will cause discontent among the population," he explained.

This will also require constant transfer of resources from region to region, Inozemtsev said, but “Putin is not concerned about this.”

"(Putin) is absolutely certain that in a year or two, the West and Ukraine will collapse. He wants to press on," Inozemtsev concluded.