Ukraine is intensifying its attacks on Russian oil refineries, crippling nearly one-fifth of Russia’s production capacity. This raises a pressing question: will Russia face a genuine fuel crisis with serious political repercussions in Moscow, or can its monopolized oil industry withstand the pressure? Economist Vladislav Inozemtsev explores the historical context and offers insights on the possible outcomes.
Oil refinery near Saratov, 20 September 2025. Photo: social media
In recent weeks, numerous experts and policymakers have debated Ukraine’s strikes on Russian oil refineries and the emerging fuel shortage in Russia, which many see as a direct consequence of these attacks.
This is not Ukraine’s first attempt to target such facilities. When the initial wave of strikes began over a year and a half ago, I acknowledged they had 'identified a perfect target', noting that if the attacks were not neutralized within a month, it would mean Kyiv had found nearly ideal targets deep within Russian territory, employing a highly effective tactic.
The current surge in attacks has only reinforced my earlier assessment: Ukraine has indeed 'hit the nail on the head' by focusing on Russia’s oil industry. However, whether these strikes will cause profound economic damage to Russia remains uncertain.
To understand this fully, one must ask: How is it possible that a major oil-exporting country like Russia is experiencing shortages of oil products domestically? This requires examining the broader context of the crisis.
Soviet legacy
First, consider the dramatic changes in Russian oil exports and domestic consumption compared to the Soviet era, along with the industry’s structure, which was largely established almost fifty years ago.
Today, Russia boasts a vast oil sector—both in terms of extraction and refining. It pumped 516 million tons of crude oil in 2024, only 7.9% below its all-time peak of 560.2 million tons five years earlier, and produced 266.5 million tons of refined oil products. Its refining capacity, close to 7 million barrels per day before the war, remains largely intact, making Russia the world’s third-largest refinery after the U.S. and China, with India potentially surpassing it by the end of the decade.
The Russian industry was initially designed to meet the demands of the entire Soviet Union—a market far larger than today’s Russian Federation. In 1989, the USSR exported just 23% of all the oil it pumped, whereas Russia exported 46.5% in 2024. Most of the processed oil in the Soviet Union was also destined for domestic use. Less than 12% of processed oil was exported in 1986 (maritime exports only), while by 2024, at least 42.6% was shipped abroad.
Industry structure remains intact
This points to a distinctive Soviet design of the oil sector: it was tailored less for consumer demand and more for the needs of the socialist industrial complex. For instance, gasoline accounted for just 18.9% of oil products in the Soviet Union in 1988, versus 45.6% in the United States. This reflects a focus on gasoil and diesel, which were used by thermal power plants for electricity generation, and for heavy railway and automobile transport.
While times have changed, the industry’s structure has not. Today, Russia produces about 41.1 million tons of gasoline annually—roughly matching domestic consumption—while other oil products total around 225 million tons, nearly five times higher than gasoline output.
This imbalance creates an immediate shortage of gasoline when refineries are taken out of business, while gasoil and diesel remain in surplus and continue to be exported. This explains why the Russian government has imposed, and recently extended, a full embargo on gasoline exports, while leaving other oil product exports largely unrestricted.
Shortages are here to stay
Based on this understanding, some key conclusions emerge about the current crisis:
First, the gasoline shortage is likely to persist for several months, probably until winter when passenger car use typically declines. With over a dozen major refineries targeted (including those nearly 1,600 kilometers from the front lines) and about 17% of total refining capacity offline, processing is down to 4.75 million barrels per day for the first time since the war.
Second, Russian oil companies can do little to mitigate the crisis. Repairing damaged facilities can take months. This is especially true given the extent of destruction and the sanctions that prevent imports of critical European and American equipment. This equipment was widely used to modernize the Russian oil industry in the 2010s, and cannot be readily replaced by Chinese alternatives.
Third, there is a less encouraging conclusion. Despite the Ukrainian attacks, overall Russian energy exports are unlikely to be affected significantly. When domestic refining drops, Russia can simply increase crude oil exports, preserving the revenue streams of oil companies and the state budget, and maintaining military funding. Moreover, since the Russian military predominantly relies on diesel rather than gasoline, supply chains for defense remain stable. Military fuel consumption constitutes less than 3% of total gasoline and diesel use nationwide.
Ukrainian achievements
What the Ukrainians can achieve – and have already achieved, one can say – is a heavy psychological effect on ordinary Russians. Fuel shortages are causing widespread discomfort for the Russian population, who link this directly with the ongoing war.
To my mind, three main sources of widespread public dissatisfaction stand out today—beyond inflation, which remains a background concern: internet and messaging restrictions, gasoline shortages, and persistent air travel disruptions. Among these, fuel scarcity is felt most acutely.
Nonetheless, the current strikes do not threaten to cripple Russia’s ability to continue its war effort, nor will they plunge the overall economy into severe distress.
No knockout blow
Recently, my CASE colleague Dmitry Nekrasov compared Ukraine’s attacks on Russian refineries in 2024-2025 to the Allied bombardments of Nazi Germany’s oil infrastructure in 1944. He concluded that the industry cannot be completely destroyed, however hard Ukraine might try.
I would add that Russia’s economy is far from the wartime economy it is often portrayed to be. The 'special military operation' consumes less than 8% of Russia’s GDP, of which at least 2% returns to citizens as military wages and bonuses, helping sustain consumer demand.
Furthermore, most Russians do not equate the conflict in Ukraine with a 'real war' comparable to World War 2. As long as the effects of the current war remain incomparable for the general public, there will not be a widespread belief that the nation is once again at war.
Thus, I expect that the consequences of the current attacks will subside, as they also did last year, while recognizing that Ukraine is inflicting the most complex damage possible under the circumstances.
Steady monopolization
Another complicating factor is understanding the trends affecting the domestic gasoline market. The Russian fuel market has long been dominated by two features: large oil majors control a substantial share of gas stations (about 9,100 of 28,900 nationwide), and gasoline is treated by the government as a major source of fiscal revenue.
The first feature results in limited competition between large firms and smaller traders. Government efforts to break this monopoly have seen little result. For instance, dominant suppliers were allowed up to a 30% regional share of gas stations, but in regions such as the Far East, fossil fuel giants Rosneft and NNK maintain a duopoly, ignoring calls for refinery modernization or new construction. Additionally, refineries must sell 15% of their output on commodity exchanges at market prices, yet prices continue to rise. Gasoline prices have increased by 7.7% in 2025, with the official year-to-date inflation rate being around 4%. Experts warn that prices may increase by a further 2-4% in October.
Meanwhile, large companies frequently refuse to ship the gasoline which they sold to small traders, preferring to pay contract penalties which are limited to 5%. This contributes largely to fuel shortages, as independent gas stations run dry while large companies operate normally.
The second feature is that the government treats gasoline as a major source of fiscal revenue. As a result, taxes and excises make up a large share of retail costs. This contributes to the rising prices. Extracting oil in Russia rarely exceeds $15 per barrel (about 10 dollarcents or 8-9 rubles per liter), but retail gasoline (Ai-95) now sells for about 64-65 rubles per liter. Refining adds 5-6 rubles, and another 5-6 rubles are added for transportation, storage, and logistics. All these costs amount to roughly one-quarter of the retail price.
The price is increased by around 30% by federal taxes on mineral extraction and hydrocarbon revenue. Then there is a 20% value-added tax, and another 21% in excise taxes which are channeled into regional budgets and allocated to road construction and repairs. Retailers profit roughly 5% of the final price of gasoline.
Map of attacked oil refineries in Russia. Graphic: Stanimir Dobrev
To mitigate price volatility, the government introduced a major reform in 2019: a so-called ‘dumper’ mechanism was instituted to compensate refineries for the price difference between domestic and export sales. The scheme works two ways: when global prices fall below domestic prices (as they did only once, in 2020), oil companies pay an extra tax; when prices are higher, the government reimburses part of the mineral extraction tax paid previously. The initiative lowers the tax burden, but I would say that its main advantage consists in preventing the gas price hikes.
Since the introduction of this scheme, gasoline prices have risen 'only' 38% in Russia, while official inflation reached 61% in the same period. Nevertheless, I would not call this adjustment a ‘subsidy’ granted to the oil companies, and would like to mention that over the last three months, the scheme’s payouts have declined to 174.8 billion rubles, compared to 440 billion rubles in June-August of 2024.
A complex crisis, but not last blow
I expect the Finance Ministry will adjust reimbursements, in order to keep the scheme affordable for the budget and at the same time ensure that there are no dramatic consequences for domestic prices. If all the dumper payments are abolished, fuel prices might increase by a maximum of 5-7%, which would not destabilize the market.
Still, the current crisis is the most complex in recent years, driven both by Ukrainian attacks (which I see as the primary cause) and domestic regulatory policies that benefit oil majors, who are trying to use the situation to decimate their competitors.
The effect of Ukrainian attacks is quite significant: about 17% of Russia’s refining capacity has been lost in recent months, while this figure likely exceeds 20% in the European part of Russia. Over 300 independent retail companies have shut since May 2025. The fuel shortages have a serious psychological effect on ordinary Russian citizens, highlighting the consequences of the war and refuting Putin’s assurances that ‘everything is going according to plan’.
Despite these challenges, I conclude that the current crisis is unable to force the Kremlin to alter its military plans or to derail Russian economy, pushing it into a recession. Fuel shortages should probably ease by year’s end and Ukrainian attacks will likely diminish, as also happened last year.
Vladislav Inozemtsev is a Russian economist designated by the Kremlin as a 'foreign agent' for his anti-Putin, pro-Ukraine writing. He is a co-founder of the Center for Analysis and Strategies in Europe (CASE), a Cyprus-based think-tank.
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