The Daily Populous Wednesday June 26th, 2024 morning edition
Authored by foreignaffairs.com and submitted by ForeignAffairsMag

Writing in May in Foreign Affairs, Michael Liebreich, Lauri Myllyvirta, and Sam Winter-Levy argued that Ukraine should keep launching drone attacks on Russian oil refineries—and that the United States should not discourage it from doing so. They cited declines in Russia’s refined oil exports and export revenues, high wholesale gasoline and diesel prices in Russia, and Russia’s move to import 3,000 tons of fuel from Belarus to illustrate that the attacks have had a dramatic impact. Because the attacks have not yet driven a spike in global oil prices, the authors asserted, they carry relatively low risk and a high reward.

But a thorough cost-benefit analysis does not, in fact, suggest that the rewards have been significant—or that the costs to Ukraine will remain low. Since October, Ukraine has launched at least 20 attacks on Russian refineries. By now, substantial information has emerged from the Russian government’s weekly reports on gasoline and diesel production levels and prices that can be cross-checked against independent price-comparison websites, wholesale prices from commodity exchanges, and export values from ship-tracking services. It is crucial to contextualize this data in longer-term and international price trends to avoid falsely attributing changes to the Ukrainian attacks or attaching too much importance to the amplitude of any given change.

Seen in that light, the data shows that the attacks have had a limited effect on Russia’s fuel production and export volumes and that their impacts did not last long. The strikes “have dealt a significant blow to Russia’s refining capacity,” Liebreich, Myllyvirta, and Winter-Levy argue, driving Russian refined oil exports to “near-historic lows.” But there is much less to the data they refer to than meets the eye. Russian oil companies have indeed likely lost about $15 per barrel in revenue from the oil they have had to export in crude rather than refined form. But this is a drop in the bucket compared with Russia’s total earnings in oil revenue. In April 2024, for instance, Russia may have lost up to $135 million because of a switch from refined oil to crude oil exports. But that same month, it earned more than $16 billion for its overall exports of oil and oil products. And because the Russian government pays domestic companies a subsidy of $10 per barrel on all the refined oil products they export, the state may even be benefiting financially from a shift toward crude oil exports, which reduces the subsidies it must pay.

Russia’s importation of fuel from Belarus—a single trainload consisting of less than half a percent of Russia’s weekly gasoline consumption—does not indicate that Russia is experiencing a nationwide fuel shortage. The Kremlin’s much-noticed six-month ban on gasoline imports was enacted before the main wave of Ukraine’s refinery attacks as a preventive measure following Russia’s 2023 fuel crisis; that crisis was created by the Russian government’s own attempt to pass the costs of price controls on to oil companies. And the gasoline import ban was lifted in mid-May after the Kremlin determined that Russia had plenty of extra gasoline in storage. The changes in Russian domestic wholesale prices can be explained by broader international price shifts, rather than effects of the attacks. Of the 12 major refineries Ukraine has damaged between January and May, half were returned to full operation within three weeks and the rest within three months.

The case in favor of the kind of strikes on Russian refineries that Ukraine has carried out so far asserts that they represent a low-cost way of hurting Russia without risking a major escalation or harming the global economy. But that is true only because the attacks’ practical effects on refineries were relatively small and short-lived; they have had little effect on the global economy precisely because they have had little effect on Russia. To make a real impact on the war’s outcome, Ukraine would have to ramp up these attacks dramatically, far more significantly reducing the volume of oil Russia can process and making it hard for Russia to supply enough fuel for its military and its domestic economy. Ukraine’s attacks would have to match the scale of the Allies’ World War II campaign against the German oil refining industry, which involved repeated raids by hundreds of bombers delivering more than 200,000 tons of explosives. A drone may be much more precise than a bomber, but it can only deliver a maximum of around 100 pounds of explosives.

A campaign of the necessary scale would surely incur a much higher risk of retaliation and escalation. Soon after Ukraine’s first attacks on Russian refineries, Russia counterattacked Ukraine’s single operational refinery—and then turned to Ukraine’s electric infrastructure. Before late 2023, Russia’s attacks on Ukraine’s power infrastructure had employed light drones and targeted easy-to-hit transformers, incurring damage that could be fixed fairly quickly. In the spring of 2024, however, the Kremlin began methodically attacking Ukraine’s power generation capacity, aiming for turbines, generators, and control equipment with massive and effective strikes. In some cases, the damage to Ukrainian infrastructure has been so extensive that it cannot be repaired.

To make a real impact on the war, Ukraine would have to ramp up its attacks dramatically.

It is possible that Russia would have expanded its assault on Ukraine’s power stations in 2024 whether or not Ukraine had attacked its refineries. But although it may look as if Moscow is waging total war against Kyiv, the Kremlin in fact appears to be fighting a compartmentalized war, leaving certain areas of Ukrainian life relatively untouched—until it decides Ukraine has provoked it into escalating. For example, for two years, Russia refrained from attacking Ukraine’s gas infrastructure, probably because the Ukrainian company Naftogaz was still transporting Russian gas to some European customers. But on April 11, Russia hit two of Ukraine’s major gas storage facilities. It seems likely that this new wave of strikes was a reaction to Ukraine’s attacks on Russian refineries—and that an even bigger attack by Ukraine would provoke a bigger reaction by Russia.

A larger-scale campaign against Russian refineries might start to affect global fuel prices. Crippling the Russian refining industry would increase the global supply of crude oil, first driving its price down, but it would simultaneously reduce the supply of finished oil products, driving those products’ price up. Russian refining capacity constitutes seven percent of the world’s total. In 2023, Russia’s share of the global trade in diesel came to around 15 percent, or 700,000 barrels per day. The world could compensate for some reduction in Russia’s contribution to this trade by increasing plant utilization elsewhere, but a halving of Russia’s export volume would certainly create a shortage and increase diesel prices. So far in 2024, however, Russia’s decline in diesel production has comprised only 150,000 barrels per day from peak to trough, less than has occurred in previous years for operational reasons.

Many observers have high expectations for Ukraine’s attacks, starting with an intangible one: boosting Ukraine’s morale and damaging Russia’s. But it is important not to conflate a reputational injury and a marginal financial loss with a strategic and economic game-changer. It is also crucial to understand the attacks’ potential future unintended consequences for the rest of the world and not to underestimate Russia’s retaliatory capacity—in other words, to look at the full set of equations, not at the most attractive part of the picture.

SERGEY VAKULENKO is a Nonresident Scholar at the Carnegie Russia Eurasia Center in Berlin.

As the head of strategy until early 2022 at Gazprom Neft, Russia’s third-largest oil refiner, Sergey Vakulenko brings deep expertise to this subject, and we appreciate his critique.

But his analysis has limitations. Vakulenko states that Ukraine’s strikes on Russian oil refineries are not a “strategic and economic game-changer”; we agree, and we did not claim otherwise. As we wrote in our original article, the strikes “will not force Moscow to capitulate, but they do make the war more difficult and expensive for Russia.” The attacks’ true costs to Russia remain hard to ascertain because the Kremlin has restricted access to economic and budgetary statistics, including oil and gas production figures. But most independent assessments suggest that Ukraine’s strikes took out ten to 15 percent of Russia’s refining capacity in the first quarter of 2024—a significant, though not devastating, cost to Russia’s war machine. Manufacturing and deploying the drones that can disable refineries is vastly cheaper than fixing those refineries; making repairs will become costlier as Russia is forced to consume its stores of specialized Western-supplied equipment. Indeed, Ukraine has already carried out follow-up attacks on some refineries that Vakulenko describes as back in operation, such as the Novoshakhtinsk refinery in southern Russia; the proportion of Russia’s gross refining capacity affected by drone strikes continued to rise throughout May.

For the most part, Vakulenko ignores our central point: that Ukraine’s refineries attacks are unlikely to drive up oil prices for Western consumers. This potential rise in oil prices is the primary reason that the Biden administration has urged Kyiv not to attack Russian refineries. But attacks on refineries reduce Russia’s domestic oil processing capacity, not the volume of oil the country can extract or export. As a result, they are likely to force Russia to export more crude oil, not less—which is exactly what has happened since Ukraine’s campaign began. Vakulenko does not dispute this, acknowledging that “crippling the Russian refining industry would increase the global supply of crude oil.” Instead, he worries that Ukraine may destroy so many Russian refineries that the rest of the world will be unable to fill the gap in refining capacity. But so far, oil refineries based outside Russia have reported no spike in their profit margins, suggesting that the world is nowhere near experiencing a real shortage in refining capacity. In other words, Ukraine’s strikes are doing exactly what we expected: driving up Russia’s domestic fuel prices while pushing down global crude oil prices.

Ukraine’s strikes took out ten to 15 percent of Russia’s refining capacity in the first quarter of 2024.

Finally, the assertion that such attacks will provoke costly new forms of retaliation relies on a distorted reading of history. Vakulenko suggests that Russia attacked Ukraine’s “single operational [oil] refinery” only in 2024, “soon after Ukraine’s first attacks on Russian refineries,” and then “turned to Ukraine’s electric infrastructure.” In fact, Russia began targeting Ukrainian oil refineries within weeks of its February 2022 invasion. By June 2022, 18 months before the first Ukrainian drone hit a Russian oil refinery, Ukraine’s entire oil sector was forced to halt operations. Contrary to what Vakulenko writes, Russia did not “refrain from attacking Ukraine’s gas infrastructure” until it was forced to retaliate for Ukraine’s refinery strikes: as early as November 2022, for example, Russian missiles hit gas production facilities owned by Naftogaz, Ukraine’s state-owned oil and gas company. And Russia’s campaign against Ukraine’s electricity infrastructure began in October 2022.

As for Vakulenko’s claim that Russia’s initial bombing of Ukraine’s power grid was targeted and restrained, relying only on “light drones” until after Ukraine began to hit its refineries, the reality is that it was anything but. Between October and December 2022, Russia fired over 600 missiles and drones, hitting more than 100 energy-related targets and destroying or damaging 50 percent of Ukraine’s power infrastructure; by May 2023, not a single thermal or hydroelectric power plant had been left untouched.

The Ukrainian leadership is not naive about Russia’s capacity to inflict destruction on Ukraine’s energy infrastructure. If leaders in Kyiv nonetheless see a strategic benefit in conducting lawful strikes on Russian oil refineries with Ukrainian-made drones—and if the risk that a spike in oil prices poses to American consumers is likely to be insignificant—the Biden administration would be ill advised to go out of its way to restrain them.

Command0Dude on June 25th, 2024 at 23:21 UTC »

Ukraine has no reason not to considering that Russia has been blowing up anything and everything they can in Ukraine. It's an eye for an eye.

Perhaps the more consequential thing is that it forces Russia to redeploy military assets to defend its interior from air attack, the same as Ukraine has been having to do.

More_Particular684 on June 25th, 2024 at 16:51 UTC »

Yes, Ukraine should, especially if oil refineries are crucial to provide Russian army with fuel for its vehicles.

consciousaiguy on June 25th, 2024 at 16:28 UTC »

Russia doesn’t export large amounts of refined products. They export crude. Hitting the refineries drives up the price of domestic petroleum products and fuel. This hurts public support for the war and makes military operations more expensive. Keep at it.