Ukraine's repeated strikes on Russian energy infrastructure have dealt a serious blow to Moscow's vital fuel exports just as Western sanctions are tightening. But if these attacks are too successful, they risk raising the ire of US President Donald Trump.
The conflict between Russia and Ukraine that began in 2022 took a sharp turn in recent weeks as Kyiv began to launch waves of drone attacks on Russian refineries, pipelines and export terminals. This has taken a heavy toll on Russia's sprawling oil and gas industry, which accounts for a quarter of the country’s GDP.
Ukraine intensified these strikes on Wednesday, as drones attacked Salavat - one of Russia's largest petrochemical complexes - for the second time in less than a week, and the Black Sea port town of Novorossiisk.
Moscow was rattled enough to respond. Deputy Prime Minister Alexander Novak said on Thursday that Russia will introduce a partial ban on diesel exports until the end of the year and extend an existing ban on gasoline exports.
Russia is a major exporter of diesel, shipping around 880,000 barrels per day in 2024, or 12 per cent of global diesel seaborne exports, according to analytics firm Kpler.
While the diesel ban applies to traders but not refiners, which account for around three-quarters of total exports, the announcement still led to a sharp rise in global diesel prices.
European diesel refining margins – the profit refiners make from processing crude into diesel – soared by eight per cent to the highest level since February 2024, according to LSEG data.
This strong market reaction is partly due to the fact that global diesel stocks are already quite tight. US inventories of distillates, which include diesel and heating oil, were 11 per cent below their 10-year average last week, according to the Energy Information Administration.
But markets may also be jittery that this new front in the Russia-Ukraine conflict may elicit more retaliation from the Kremlin – far more than Western leaders are banking on.
Russian President Vladimir Putin clearly did not make this decision lightly, as a sharp drop in diesel exports deprives Moscow of vital cash. Revenue from seaborne refined product exports reached around $170 million per day in August, or $5.3 billion for the month, according to the Centre for Research on Energy and Clean Air.
And, importantly, he made this decision at a time when Western sanctions on Russia's oil and gas industry are tightening.
Over the past few years, Europe, the United States and other major Western economies have delicately crafted sanctions to limit Moscow's revenue from energy exports while avoiding a global price shock.
Thus, while these Western powers have agreed to largely ban Russian oil imports, they have not attempted to curtail the flow of Russian crude entirely.
Instead, the Group of Seven countries in 2022 introduced a price cap on Russian crude and refined oil that shippers and insurers must abide by to avoid sanctions.
This strategy has prevented a global supply shock, but the financial impact on Moscow has also been limited. This is largely because of the significant expansion of the so-called "shadow fleet" of tankers that Moscow’s trading partners use to evade Western restrictions.
In fact, 64 per cent of Russian crude oil exports in August were shipped on shadow fleet tankers, an 11 per cent increase from the previous month, according to CREA.
That was not the only workaround. A loophole in the EU’s sanctions package allowed India and Turkey to import inexpensive Russian energy and then sell it to Europe in the form of refined products.
In response to all this, the EU in July adopted an 18th package of sanctions against Russia. This lowered the cap on Moscow’s crude exports to $47.60 a barrel from the original $60. Russian diesel exports face a $100 cap, which the EU did not lower. Additionally, the EU said it is planning to introduce an import ban on refined oil products made from Russian crude.
But these measures alone did not cause Russia to retaliate with its partial diesel export ban. It did so only after Ukrainian drones started hitting its refineries, suggesting it's the combination of both economic and military attacks on its energy industry that is hitting a nerve with the Kremlin.
But the apparent effectiveness of this strategy could end up being a problem for Western economies. That’s because it could upset the delicate balance between punishing Moscow and avoiding sharp increases in energy costs.
This is particularly true for Trump, who made lowering domestic energy prices a key electoral promise. And it could help explain the president’s equivocation regarding Moscow.
On the one hand, Trump agreed to the attacks on Russia's energy infrastructure, according to Ukrainian President Volodymyr Zelenskiy in an interview published on Thursday.
But Trump also appears reluctant to tighten sanctions on Russia's oil industry despite making multiple threats, arguing instead that the first step should be Europe completely stopping its purchases of Russian oil and gas. This hesitancy could certainly be related to fears of rising gas prices and inflation pressures.
Ukraine’s strategy of targeting energy infrastructure, therefore, might succeed in squeezing the Kremlin’s finances, but if it elicits retaliation that leads to a sustained increase in oil prices, Kyiv might lose the tenuous support of the White House.
(Ron Bousso; Editing by Nia Williams)
