Smoke billows after Ukraine's SBU drone strikes a refinery in Ryazan, Russia, in this screen grab from a video obtained by Reuters on March 13.Video Obtained By Reuters/Reuters
While Ukraine is outmanned and outgunned by Russia and again losing territory, it can point to three morale-boosting successes since the war started more than two years ago.
The first is the destruction in 2022 of the Nord Stream pipelines under the Baltic Sea, the main suppliers of Russian natural gas to Northern Europe, especially Germany; the culprit of the subsea sabotage is still a mystery. The second is the elimination of a third of Russia’s Black Sea fleet through missile and naval drone attacks, a remarkable achievement that allowed Ukraine to reopen its crucial grain-export corridor from Odesa and ports nearby. The third, and most recent, is the series of drone attacks deep inside Russia that damaged a dozen oil refineries, taking out 10 to 15 per cent of the country’s refining capacity, according to various estimates.
But of the three, only the mauling of the Black Sea fleet can be considered an unequivocal victory for Ukraine and the Western countries, most of them NATO members, who supply Kyiv with weapons and funds to cover its gaping budget deficit.
The Nord Stream and refinery attacks – plus the near-elimination of Russian oil exports to Europe – were clearly designed to starve Russia of energy income, all the better, in turn, to starve President Vladimir Putin’s war machine. Oil and gas revenues accounted for 30 to 50 per cent of Russian budget revenues in the past decade and some 20 per cent of GDP, according to the Oxford Institute for Energy Studies. Cripple the energy industry and you cripple Russia – or so the theory went.
Instead, something approaching the opposite has happened – is happening. The Russian economy is not ailing in spite of the pipeline and refinery attacks and the European oil-import clampdown. It is Europe that is suffering. High energy prices have helped propel Germany, Europe’s biggest economy and its leading manufacturer, into recession while forcing the closing of some of its most energy-intensive businesses. Revised figures released this week also show that the U.K. went into recession last year. Russian oil that was once flowing to Europe is being purchased with alacrity in Asia, notably India (though at discounted prices).
And while the refinery attacks have angered and embarrassed the Kremlin – multibillion-dollar plants are being torched by suicide drones that cost US$200,000 or less – Russia’s pain is being mitigated by higher oil prices. Brent crude, the international benchmark, is up about 12 per cent in the past year, with most of the gain coming since December, roughly coinciding with Ukraine’s drone onslaught on the Russian refineries.
Markets are not always rational, and they certainly do not appear to be rational as the refineries burn. The oil price rise suggests that investors fear the refinery attacks will reduce supply. While they will certainly cut the output of refined products such as gasoline for some time in the Russian market, it appears the global export markets will, if anything, receive extra dollops of oil. That’s because the Russian crude that was destined for the now-damaged refineries is being diverted onto the export market. In that sense, Russia wins.
The failed, or at least only partly successful, attempts to hurt the Russian economy need a rethink, since they seem to be hurting the West as much as Russia, or more. The White House is pleading with Ukraine’s state security and military intelligence services to halt the refinery attacks, according to a March 22 report by the Financial Times. The Biden administration knows that rising gasoline and diesel prices are vote killers in an election year and can also stoke inflation.
Still, the United States is stuffed with high-profile politicians who do not seem to realize that encouraging the obliteration of energy infrastructure carries risks for both sides. In October, when Israel and Hamas went to war with each other, U.S. Republican Senator Lindsey Graham said “We must be clear in our message to Hamas and Iran: if you escalate this conflict any further, we will come after your oil refineries and destroy your industry” (Iran was OPEC’s third-largest oil producer last year).
If United States had made good on his threat, a global energy war would have been inevitable. We may be on the verge of one already, with Ukraine attacking Russian refineries and Nord Stream out of commission (Sweden and Denmark described the pipeline explosions as sabotage and closed their investigations into the attacks in February, without identifying the perpetrators). The oil markets are truly global and liquid, with even minor supply disruptions capable of triggering outsized price increases. Short of weapons from the West, Ukraine is desperate to inflict grave wounds on Russia’s globally important energy infrastructure. Russia may not emerge as the biggest loser if Ukraine succeeds.