Prodding Open Wounds: Ukraine’s War on the Russian Oil & Gas Sector

Ukraine's intensified strikes on Russia's energy sector have brought domestic political consequences for Moscow. Gasoline and diesel shortages have impacted most regions, with some suspending sales entirely. Over 50 million people have been affected, and the ten largest refineries have been targeted. Deputy Prime Minister Aleksandr Novak imposed a diesel export ban in July, signaling more measures to stabilize markets.

Military attacks have primarily hit gas refining infrastructure, but border regions like Belgorod have also faced limited strikes. The cumulative effect of these attacks on the economy and Kremlin plans remains uncertain. Fuel rationing for domestic front needs intensifies wartime economy imbalances. Russia's defense spending has distorted its economy since 2022, driving a high investment share of GDP and high labor market tightness.

Wartime spending has siphoned resources into military goods, requiring continuous spending and replacement. Labor markets are perpetually tight, leading to a need to cut public services. Inflation management has become nearly impossible without prohibitively high interest rates, as military demand for capital, goods, and labor is insensitive to costs and rates.

Borrowing costs have dwarfed the federal budget deficit's impact, and high rates have reduced private-sector investment. Fuel prices have risen over 10% in 2025 and 20% this year, accelerating inflation despite zero growth. Inflation expectations are rising, and the economy is already in stagflation. The strike campaign on refineries has exacerbated pre-existing problems, and transport and utility tariffs have risen faster than inflation.