Russian Energy Sector Under Fire
SWARMING UKRAINIAN DRONES | WACK-A-MOLE ON STEROIDS
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“Barbershop Whispers….Russia (BWR)” begins with “My Takeaways” on the main topic, followed by a discussion on the main topic. The last two BWR sections are “Follow-ups” on previous publications and “Quick Bites” on emerging events.
In last week’s BWR, I discussed Russia and China's battle with the U.S. for influence and resources in Latin America. Like Rip van Winkle, the U.S. has woken from a decades-long sleep to find Russia and China embedded in the Latin American economy. What is to be done?
In this week’s BWR, I will discuss Ukrainian drone attacks and more US sanctions targeting Russia’s energy sector. Drones and sanctions continue to slowly degrade Russia’s economy, but is it enough?
Takeaways
AIR DEFENSE—The Armed Forces of Ukraine (AFU) continues to launch swarms of kamikaze drones into Russia, attacking Russia’s energy sector—and taking out oil refineries and fuel depots. Apart from the lost revenues from damaged refineries, the greater impact is psychological. The war is brought home to Russian civilians.
MORE US SANCTIONS—While sanctions do increase the cost of energy exports and reduce the Kremlin’s revenues, the impact is short-term. Sanctioned vessels will change flags and jurisdictions, as will oil traders. Workarounds will be in place within 3 months.
Russian Energy Sector Under Fire
SWARMING UKRAINIAN DRONES | WACK-A-MOLE ON STEROIDS
Swarming Ukrainian Drones
Ukraine has kicked off 2025 with a bang. So far this month, it has launched multiple waves of drones targeting Russian oil refineries and storage facilities, continuing the strategy from 2024. For example, the NORSI refinery in Kstovo, Nizhnygorodskaya Oblast, located 800 km from the Ukrainian border, was struck again this past week. It had been repaired in November 2024 after the first attack, only to go up in flames once more due to a Ukrainian drone strike.
It is worth noting that NORSI is the fourth-largest refinery in Russia and relies heavily on Western technology, which means spare parts are likely Western-sanctioned manufactured parts.
In conversations with Nizhny Novgorod citizens, I am told that drone attacks are a common occurrence.
Other targets included fuel and missile depots in Smolensk, Tver, Ryazan, and Bryansk, deep within Russia itself. A drone hit the Russian Andreapol oil pumping station, which is part of an export route supplying crude oil to the Baltic Sea port of Ust-Luga. The damage to the pumping station was severe enough to halt the oil flow to the Ust-Luga port and stop the loading of crude oil. Oil tankers at the Baltic port are now empty and idle.
Russia’s Defense Ministry (MOD) often claims it has shot down most Ukrainian drones, and any damage to the Russian targets is due to falling debris from the destroyed drones. However, Russia's turbo-patriot and Z-blogger rants and videos on Telegram tell a different story: a story of frustration with the MOD’s inability to protect Russian airspace and infrastructure against Ukrainian drones.
According to an analysis based on 2024 media and government data prepared by the BBC Russian Service, Ukrainian drones carried out 81 attacks on oil refineries and fuel storage facilities across Russia proper and the Russian-occupied Ukrainian territories. Approximately 20% of the strikes occurred in the Krasnodar region, while Rostov, Belgorod, Orel, and Volgograd also experienced repeated attacks.
The Financial Times reported that US officials in March urged Ukraine to stop targeting Russia’s energy infrastructure out of concerns it could disrupt global oil markets and generate Russian retaliation. During 2024, the strikes caused disruptions to fuel production, reducing gasoline and diesel output, driving up domestic prices, and fueling inflation.
Reuters reported that idle refining capacity increased to 2.7M tonnes in November 2024, with year-to-date downtime rising by 17% compared to 2023. According to Pamela Munger, of Vortexa LTD,
“The year-to-year decrease is likely due to the drone strikes on refineries and high turnaround or maintenance season on secondary units,”
On the surface, Ukraine’s cost-benefit analysis of continuing drone attacks appears compelling. The direct financial cost of each attack is about $2.5M per raid and site—a relatively small price considering that success means temporarily disabling a multi-billion dollar money machine heavily reliant on Western-sanctioned kits. The result is extended production downtime because Western-sanctioned parts are not readily available and would need to be procured ad hoc or substituted with less efficient copycat parts. This downtime leads to lost domestic and export revenues and costly repair expenses. It also contributes to higher inflation due to reduced supply.
The greater benefit is psychological. It demonstrates Ukraine’s ability to reach targets deep inside Russia. This is not lost on Russian soldiers, citizens, and especially the Z-blogger space that continues to call for an all-out war against Ukraine.
Wack a Mole on Steroids
Before leaving office, President Biden announced a series of new sanctions aimed at reducing the Kremlin’s revenues from Russian oil production and exports. The updated sanctions list includes over 180 vessels and numerous companies that offer support services, such as maritime insurance, energy trading, and oil field service providers, as well as Russian oil production subsidiaries in the EU and UAE.
The new sanctions target Russian producers Gazprom Neft, Surgutneftegas and others, along with Russian insurers Ingosstrakh and Alfastrakhovanie. Commenting on these sanctions, US Treasury Secretary Janet Yellen stated,
“This action builds on, and strengthens, our focus since the beginning of the war on disrupting the Kremlin’s energy revenues, including through the G7+ price cap launched in 2022 […] with today’s actions, we are ratcheting up the sanctions risk associated with Russia’s oil trade, including shipping and financial facilitation in support of Russia’s oil exports.”
The UK followed with sanctions against the same group of companies, sectors, and vessels. The UK had already sanctioned Ingosstrakh and Alfastrakhovanie in 2024.
In 2024, Russian crude oil accounted for 40% and 20% of India’s and China’s imports, respectively. The immediate consequences of the new US sanctions will increase the shipping cost to Russia, and India and China will demand a greater discount price for Russian crude oil.
The new sanctions leapfrogged EU efforts by targeting two existing Russian LNG projects, Portovaya and Vysotsk LNG, both situated in the Baltic Sea. However, it's important to note that the Portovaya and Vysotsk LNG facilities are smaller exporters compared to the Yamal LNG project, which accounts for over 90% of the Russian LNG imported into the EU. While the US supplied more than 48% of the EU’s LNG in 2024, Russia followed with 16%.
Conclusion:
Ukrainian drone attacks and Western sanctions increase the cost of exporting Russian oil and gas, but the impact on the Kremlin’s revenues is short-term. The Kremlin will execute workarounds and evade sanctions by re-flagging and re-naming ships.
Additional Reading(s)
Going out with a bang: US sanctions over 180 vessels and dozens of entities in unprecedented Russia crackdown (Lloyd’s List, 10 Jan 2025)
Russian Oil Price Cap & New Ecosystem (Barbershop Whispers, 22 Oct 2023)
A Bumper Year for Russian LNG Exports to the EU (Deutsche Umwelthilfe, January 2025)
What is the Real Cost and Benefit of Ukrainian Attacks on Russian Refining? (Carnegie Politka, June 2024)
New U.S. and UK Sanctions, Including Related to Russia’s Energy Sector (Covington, 15 Jan 2025)
EU Imports More Russian LNG in 2024 Than Ever Before, Mostly From Arctic (High North News, 6 Jan 2025),
Follow-ups & Quick Bites
Follow-ups
Venezuela Releases Six American Prisoners During American Diplomat Visit
Illegitimate Venezuelan President Nicolás Maduro met with the US envoy for special missions, Richard Grenell, in Caracas this past week.
Grenell’s mission was to strike a repatriation agreement with Maduro for the illegal Venezuelans to be deported back to Venezuela. Grenell also returned to the US with six Americans who had been held in prison in Venezuela. Maduro stated at a press conference,
“I have seen three U.S. presidents pass before me. This is the fourth term, and our message has been one: We want to build relationships of respect for Venezuela’s sovereignty, for Venezuela’s democratic life, for international law and for our Latin American region.”
In last week’s BWR issue, I discussed the Trump administration’s emerging repatriation strategy for illegal aliens. I questioned what role, if any, Russia would play in these negotiations since these are Russian client states. Given Russia’s weakening influence in the region, it very well may have no role.
Quick Bites
Serbian Refinery Threatened with U.S. Secondary Sanctions
Naftna Industrija Srbije (NIS), Serbia’s largest refinery, which is majority-owned by Gazprom (6.15%) and Gazprom Neft (50%), faces U.S. secondary sanctions if it does not complete a 100% exit of its Russian shareholders by 12 March 2025.
Serbian President Aleksandar Vučić said at a press conference in January,
"These are the most severe sanctions ever affecting a company in Serbia […] they (US) are asking us for a complete exit of Russian interests They do not even allow the possibility of a 49 percent stake, but demand a complete exit from NIS."
NIS has a colorful Russian history dating back to 2009 when the Serbian government sold a majority stake to Gazprom for $400M. The shares were sold to Gazprom, conditioned upon follow-up investments of $500M. The acquisition price was significantly less than its supposed market value at the time, and it is questionable whether the follow-up investments ever materialized.
Vučić is also facing civil unrest because of public corruption accusations related to the collapse of a shopping center that killed dozens of people. Taking a page out of Putin and Ivanishvilli’s anti-Western playbook, Vučić blames the civil unrest on foreign influences in Serbia.
Watch this space as potential U.S. and E.U. buyers compete for the NIS Russian equity stake and the Kremlin struggles to remain relevant in the Balkans.
Additional Reading(s)
Serbian Oil Company May Face US Sanctions Over Russian Ownership (Barbershop Whispers…Russia, 22 Dec 2024)
Serbia Hit With Double Whammy on Gas Supply (Politico, 11 Jan 2025)Additional Reading(s)
Vol 3, No 05 - BWR 02.02.2025
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.