Energy is the target as war between Ukraine and Russia enters new phase

Warring states seek to land economic blows that could decide conflict but IEA fears damage to global markets

Engineers at a Ukrainian thermal power plant heavily damaged by recent Russian missile strikes. Reuters

Russia and Ukraine may have struggled to make battlefield gains for more than 16 months but a new phase of the war has wider repercussions.

Both sides are now attacking energy assets to damage their enemy’s economy and collateral damage can be seen in global markets.

The International Energy Agency has said Ukrainian drone attacks on Russian oil refineries are likely to disrupt trade in products such as diesel. European gas prices jumped as much as 10 per cent after Russia struck Ukraine’s gas and power infrastructure this week.

Ukraine’s army is facing ammunition supply shortages, while the US is stalling new funding and European allies are trying to figure out how to build and ship more weapons to Kyiv.

The latest Ukrainian strategy is to attack Russian energy facilities, despite Washington voicing concern about the effect on oil and gas prices.

So far this year, Ukraine has hit 14 major refineries and two smaller plants in Russia, with most of the attacks in disrupting operations to some degree.

Meanwhile, the Kremlin has launched three large-scale assaults on Ukraine’s electricity network and directed drones and missiles at key gas infrastructure for the first time since its invasion more than two years ago.

On Thursday, Russia destroyed the largest power plant in the Kyiv region in what President Vladimir Putin said was a tit-for-tat response to Ukraine’s attacks.

What has changed is that targets that were previously off limits are now coming into play, according to Sergey Vakulenko, who spent a decade as an executive at a Russian oil producer and is now a scholar at the Washington-based Carnegie Endowment for International Peace.

“Both sides are probably realising that the war on the front is turning into a stalemate and they cannot get any decisive outcome there,” Mr Vakulenko said.

“It also seems that initially there were certain explicit or implicit gentlemen’s agreements making some targets off-limits. After two years of brutal war, some if not most of these agreements are probably dead.”

The escalation might also simply be down to new military capabilities. Russia’s bombardment of Ukrainian energy sites has been larger and better planned than the attacks in the previous two years, knocking out generating plants and damaging power supplies.

For its part, Ukraine is at its most fragile moment since Russia’s invasion, according to western officials.

Kyiv is using long-range drones to attack the oil refineries in an attempt to disrupt fuel supplies to the army, hit Russia’s finances and the Russian population psychologically. But Russian forces remain formidable.

Ukraine’s recent strikes come at a time of ammunition and manpower shortages and depletion of its air defence after a failed counteroffensive last year.

Russia has claimed gains in Ukraine’s east, although it remains to be seen whether the Kremlin will have the resources to deliver a significant breakthrough.

US Defence Secretary Lloyd Austin urged Ukraine to focus on military targets instead because of the impact on global markets. Ukraine has warned, though, that it could lose the war if more than $61 billion worth of aid held up by Congress for months is not approved.

Ukraine is in close contact with its allies and has listened to their concerns, sources close to President Volodymyr Zelenskyy said.

The lack of ammunition and Russian attacks on Ukrainian towns and cities means Kyiv has to do everything to hit back, the sources said.

Officials also questioned US statements that attacks may push up petrol prices, arguing that if Russia is forced to reduce refining it will increase exports of crude oil to the countries not involved in sanctions.

Ukraine has attacked refineries with combined capacity of about 3.4 million barrels a day, Bloomberg calculations indicated.

However, some of the affected facilities can deploy spare or underused processing units. Undamaged plants are also raising their throughput.

Drones have reached targets as far away as 1,200km. Analysts at JP Morgan Chase & Co said that puts 19 Russian refineries with a combined capacity of 3.8 million barrels a day – or more than half the nation’s capacity – in play. If the range increases to 1,500km, another 600,000 barrels would be at risk, they wrote.

Russia expects to have all the damaged refineries repaired by June, Energy Minister Nikolai Shulginov told said this month.

Officials including Deputy Prime Minister Alexander Novak have also reaffirm the domestic fuel market remains stable and demand is being fully met.

In Kyiv, meanwhile, the Russian strike this week set ablaze the turbine hall of the coal-fired Trypilska plant about 45km south of the capital. It was hit by six missiles, a source said.

For Ruslan Pukhov, head of the Moscow think tank Centre for Analysis of Strategies and Technologies, it is a reminder of the war between Iran and Iraq in the 1980s after an impasse on the battlefield. Cities and their infrastructure then became more embroiled in the conflict, he said.

“The stalemate at the front is pushing both sides to try to pressure the civilian population and economy of their opponent,” Mr Pukhov said.

“This reminds one increasingly of the ‘war of the cities’. Russia has the most resources and ability to harm Ukraine.”