Ukraine’s strikes on Russian refineries spark fuel shortages, export bans, and price hikes
Photo for illustrative purposes. Vapour escapes from processing complex during operations at the Bashneft-Ufaneftekhim oil refinery, operated by Bashneft PAO, in Ufa, Russia, on Tuesday, Sept. 27, 2016. (Andrey Rudakov/Bloomberg via Getty Images)
Over the past week, Ukraine's Armed Forces carried out new strikes on Russian oil refineries, forcing Russian authorities to extend a ban on gasoline exports and announce the introduction of a partial ban on diesel exports.
Ukraine's sustained campaign of strikes on refineries is now causing mild havoc at gas stations in Russia and occupied Crimea, with prices skyrocketing and short-term shortages widely reported.
While, for now, these strikes are unlikely to cause massive disruptions to global supply chains, market experts who spoke to the Kyiv Independent say Russia's highly profitable diesel and gasoline exports are still taking an unprecedented hit.
A domestic energy crisis is also at play.
Ukraine's new strikes
Over the past two months, Russian refineries have been a focal point of Ukraine's long-range strikes.
On Sept. 24, explosions were reported at Salavat, an oil refinery located in the Republic of Bashkortostan, over 1,200 kilometers east of the nearest Ukraine-controlled territory.
Footage published on Russian Telegram channels showed the Salavat refinery, one of the largest facilities of this type in Russia, engulfed in flames. Local authorities soon claimed that Ukrainian drones were responsible for the explosions.
This claim was later confirmed by the Security Service of Ukraine (SBU), which said that it had planned and carried out drone strikes targeting the refinery.
On the same day, Ukraine also attacked Russia's port of Novorossiysk, causing damage to infrastructure used for Russia's fossil fuel exports.
These strikes were followed by another military operation, this time targeting Russia's Afipsky oil refinery on the outskirts of the city of Krasnodar, in southern Russia. This facility was damaged for the second time, following a previous Ukrainian strike in August.
"Since the start of August, Ukraine has hit nearly half of Russia's refineries, some of them were hit twice or even three times," Benedict George, the deputy editor of Argus Media and a diesel and gasoil markets specialist, told the Kyiv Independent. "Oil tracker data shows that Russia's diesel and gasoline exports have fallen 30% as a result."
Impact on global markets
Following Ukraine's recent strikes, Russian authorities announced on Sept. 25 that they would extend existing restrictions, and add new ones as well. However, it remains unclear whether the limitations were actually introduced after these announcements.
"Diesel is still being exported, so I don't see the current situation having a big influence on the Russian economy," argued Irina Malkova, editor-in-chief at The Bell, a business-oriented exiled Russian media outlet.
Russia's full stop on diesel exports would, however, have a "significant impact" on global markets, as Russia is the second largest exporter of this commodity in the world, George said. Even a marginal decrease in exports is already forcing Russian fuel clients to reorient their imports to other sources.
According to the diesel markets expert, cuts on Russian fuel exports have hit more "distant" import markets, such as Brazil or the United Arab Emirates, as these were the first ones to be limited for logistical reasons.
Brazil, for instance, is already turning to imports from the United States to replace those in short supply from Russia. Closer markets, especially Turkey, have been less affected for now.
In absolute numbers, Russia's diesel exports total approximately four million tons per month, with each ton sold at an average price of $600, George explained. "This gives an idea of how much money Russia is losing as a result of Ukrainian strikes."
However, Russia's significant losses do not mean that a ban on Russian exports would necessarily cause a global fuel supply crisis, as international markets can largely reorient their imports to other sources.
Domestic fuel crisis
While international clients are relatively flexible, this is not the case for consumers inside Russia.
Independent reports over the past week have shown a mounting supply crisis in some parts of the country, especially in southern Russia, Russian-occupied Crimea, and the Far East. Fuel has become increasingly rare at gas stations, forcing them to hike prices and introduce rationing systems.
The situation is especially difficult in occupied Crimea, which depends on imports from neighboring territories of Russia. Shortages for consumers were confirmed by a local inhabitant of Crimea, who reported on the situation anonymously out of concerns for their security.
In the city of Kerch, for example, fuel was still supplied at a relatively regular rate until the beginning of last week, with locals reporting no issues in particular, except for a significant hike in prices.
However, by the end of last week, the situation significantly worsened, according to an inhabitant of Kerch who spoke to the Kyiv Independent.
"(By now) only card payments are accepted, and cars need to provide documents proving what organization they belong to (private customers are not sold fuel at all). I was in Stary Krym (a town in the eastern half of Crimea) on Friday, and there was no gas at all there (for private customers). There is no gas in Kerch either."
"I only saw one gas station, near Stary Krym, which accepted cash payments (and private customers), and there was a line of about 20 cars waiting in front," the local from Crimea added.
'Difficult to foresee' long-term consequences for Russia
While at the local level the situation might seem dramatic, especially for consumers deprived of access to fuel, the wider effects of Ukraine's strikes on Russian refineries seem less clear.
Providing even an approximate figure of Russian losses is "difficult," according to Malkova.
"A lot of Russian companies running refineries don't publish their exact production data. Also, Ukraine's recent drone strikes began in the summer, at a time of year when these facilities often undergo scheduled maintenance. This makes it harder to evaluate the effects of the attacks," Malkova said.
Kyiv's strikes on Russia's oil sector have severely disrupted fuel supplies and logistics for Moscow's armed forces.
"Also, the extent of the damage done to these facilities is not clear, and some of them might still be partly operational. So, it is difficult to come up with even an approximate figure" of the potential decrease in Russian fuel production following the strikes, Malkova argued.
In any case, it seems "unlikely" that Russia would suffer generalized fuel shortages across the country, even if local shortages will inevitably drive up prices at the pump, creating additional inflation pressure across Russia, the journalist explained.
While it is still unclear whether striking Russian refineries will have long-term consequences for Russia, the short-term effect is definitely in place.
Ukraine's Commander-in-Chief Oleksandr Syrskyi said on Sept. 25 that Kyiv's strikes on Russia's oil sector have severely disrupted fuel supplies and logistics for Moscow's armed forces.
"This is a fuel crisis in Russia, which directly affects logistics and the supply of its army," Syrskyi said at a meeting with journalists attended by the Kyiv Independent.
On Sept. 27, Ukraine's Armed Forces continued these attacks, this time targeting an oil pumping station in Russia's Chuvashia region, located approximately 1,000 kilometers from the Ukrainian border. Local authorities in Chuvashia reported that the facility's operations were suspended as a result of the attack.
