Russia and Ukraine continued to trade tit-for-tat strikes on each other’s essential energy assets over the weekend.

After hitting Russia’s main Baltic oil export ports at Primorsk and Ust-Luga on March 23-24 and causing major fires that temporarily shut down production, the Armed Forces of Ukraine (AFU) stepped up the attacks, hitting the ports again and targeting a number of key refineries.

The port facilities at Russia's Ust-Luga was still on fire several days after Ukraine's first strike on March 24.

The port sustained fresh damage from a Ukrainian drone attack on March 28, Governor Alexander Drozdenko said in a Telegram post. Air defences have shot down 31 drones  as Ukraine renewed its attack for the fourth day, while the emergency services were still working to put out a fire at Ust-Luga port. Loadings at Ust-Luga have not resumed since they were halted on March 25 after it sustained significant damage in the initial attack.

Russia’s Baltic ports of Primorsk and Ust-Luga continue to play a central role in exporting high-sulphur crude from Siberia, particularly as flows via the Druzhba pipeline have declined in importance.

Along the Druzhba route, domestic refineries including Yaroslavl and Kirishi divert part of the crude stream for processing into petroleum products, reducing volumes available for export.

Current crude offtake along the system is estimated as follows:

▪️ Primorsk – 1.0mn barrels per day
▪️ Ust-Luga – 0.7mn bpd
▪️ Druzhba via Ukraine – 0.2mn bpd
▪️ Kirishi refinery – 0.4mn bpd
▪️ Yaroslavl refinery – 0.3mn bpd

In total, these flows account for approximately 2.6mn bpd out of Russia’s overall crude production of 9.2mn bpd, equivalent to roughly 28%.

The Armed Forces of Russia (AFR) responded with a missile strike on Poltava Ukraine's main gas producing facilities – an essential source of energy that reduces the need to import from the EU partners.

“Ukrainians are now really going for the complete elimination of the oil terminal in Ust Luga, Leningrad region, in Russia. UAVs just keep on coming in,” German OSINT analyst Tendar said in an online post. “Judging by the intensity of the UAV swarms recently there is a chance that Russians will soon run low on air defence missiles.”

In March, Ukraine increased its drone strikes on Russian oil infrastructure, targeting all three major western ports – Novorossiysk on the Black Sea, the Primorsky ports, and Ust-Luga on the Baltic Sea – as well as oil pumping stations, pipelines, and refineries, including the KINEF refinery in Kirishi. The latest target was  Russia’s Yaroslavl Oil Refinery, setting it ablaze on March 28, Russia’s fifth largest refinery.

Russian authorities are now considering reimposing a ban on gasoline exports to conserve supplies.

The Novorossiysk port, capable of processing 700,000 barrels daily, is operating below capacity following early March Ukrainian strikes.

The Baltic Sea ports of Primorsk and Ust-Luga halted shipments on March 25 after Ukrainian drone attacks on March 23- 24. Frequent detentions of shadow fleet tankers in Europe have also disrupted 700,000 barrels per day from Murmansk.

Additionally, the UK has authorized the seizure of Russian shadow tankers that resist surrender, are armed, or use advanced surveillance to avoid capture. The Kremlin launched a formal protest at the proposal, calling it an "act of piracy."

Russia's oil exports down

Reuters reported that Russia's oil exports are down by 40% after the first onslaught at the end of last week, but if so, that is yet to show up in the export statistics.

Bloomberg reported on March 25 that Russia’s average daily oil export revenues doubled to about $270mn in the first three weeks of March, compared with roughly $135mn in January, as prices spiked amid disruption in the Strait of Hormuz.

In play it is a change to the tax rules last year where the Ministry of Finance ended taxes on oil exports and introduced a new system of the mineral extraction tax (MET).

Under the new system the ministry charges tax based on the volume of oil extracted from the ground and not the amount sent overseas. That means the Kremlin gets paid irrespective of any oil flowing in or out of Russian ports. Until Russia's oil companies are forced to cut production, something they haven't done yet, then the Kremlin will receive the same income as it did even if the Baltic point ports are completely closed down. In that case, production will be eventually affected if the two main ports are not reopened, it does buy the Kremlin some time while oil exports are rerouted through other channels.

One of the options is to send more oil through pipelines to central Europe, and boost exports from the coast in the Far East, although the Druzhba row means the westward route is currently shut down, following a drone attack on the infrastructure in January.

Another option is to send more oil to Asia by the so-called Northern Route, which is just opening now that the winter’s sea ice is disappearing. So, there is unlikely to be any short-term impact on the Russian budget but it could be reduced in a few month’s time depending on how much of Russia's export restrictions affects production amongst the leading oil companies.

Reuters has claimed that the Ukrainian "sanctions" have reduced Russia's oil export capacity by 40%. As a result of Ukrainian drone attacks and the detention of shadow fleet tankers, at least 40% of Russia's oil exports – two million barrels daily – have been affected. It is the most significant in Russia's recent history, and coincides with the discounts offered on Russia’s Urals blend to the benchmark Brent blend falling to zero as Brent prices surpass $100 per barrel. Indeed, in Asia Urals blend is now trading at a premium to Brent for the first time in years.

Counterproductive

Kyiv is hoping to starve the Kremlin of oil cash by hitting its oil export infrastructure. In fact, it may be having the opposite effect. Oil is still getting out, but by adding to the uncertainty of supply, Ukraine is contributing to pushing the price of oil up that will make Russia even more money.

Every $10 rise in the Urals crude price adds roughly $1.5bn to Russia’s monthly MET revenues at current extraction rates. The rise in the average price is expected to bring in an additional $4.5bn for the Russian federal budget in March alone – even assuming a reduction in export volumes. Should the price of oil remain elevated for four months, as many energy analysts now see as the baseline scenario, it would bring in the equivalent of 0.8% of Russia’s GDP in additional revenues to the budget.

No longer feeling a shortage in oil revenues, but in fact anticipating a surplus above the Kremlin’s budget, Moscow has already paused planned changes to its fiscal rules defining how much of the money stashed in the government’s rainy-day fund should be spent. There is a chance they may also reconsider spending cuts.

Russia hits back at Ukraine’s gas

Russia retaliated for the strikes on its oil infrastructure in the Baltic Sea following the massive attack on Poltava over the weekend, Ukraine's biggest gas producing company.

The strike was designed to talk out the infrastructure of the key gas production operations. A major fire broke out and emergency services were deployed to contain the blaze, authorities said . The extent of the damage has not yet been fully determined.

Ukraine’s domestic gas production is concentrated in the Poltava region and is critical to reducing reliance on imports. The country’s largest producer, state-owned Naftogaz, has previously warned that energy infrastructure remains vulnerable to sustained Russian missile and drone attacks.

The latest incident follows a winter campaign that destroyed an estimated 80% of Ukraine’s electricity generating capacity as Russian President Vladimir Putin attempted to freeze Ukraine into submission during one of the coldest winters in decades. Gas infrastructure has also been targeted, but to a lesser extent.