Drone Strikes Are Pounding Russian Economy, Raising War's Cost For Putin

There are two elements to this story. The first is that the fact of the damage being inflicted by Ukraine's long range strikes on Russia's economy can no longer be considered some quixotic anomaly. They hurt and Ukraine is now in a position to make them keep hurting, raising the long term financial impact on the Kremlin and its ability to continue waging a wasteful war. 

The second aspect of note is that when the Wall Street Journal and other respected media like it highlight these costs, it means that global decision-makers have taken note so that this failure on Russia's part is part of the consensus impacting perceptions of relative strength, which ultimately drive resource allocation and investment. Which is a long way of saying that, to some degree, Putin has already lost, even with China's backing and even if Russia doesn't actually lose the war in the classic, historical sense. The only question is how the final endgame gets resolved so the world's economy can move on. JL

Alexander Osipovich reports in the Wall Street Journal:

Ukraine's long-range drone strikes are inflicting pain on the most strategic sectors of the Russian economy. The costs are adding up. The Ukrainian effort is being felt by ordinary Russians who were previously shielded from the war’s consequences. The broader economy was already slowing after an earlier wartime boom. The most damaging aspect of Ukraine’s drone campaign has been its targeting of oil refineries, which led to fuel shortages and rationing measures over the summer. The price of gas is up 19% this year. The run-up has confounded efforts by Russia’s central bank to curb inflation, which is running at 6% annually. Attacks on ecommerce logistics hubs have caused more than $10 billion in damage to infrastructure and goods, and will result in at least $12 billion in lost sales over the next 12 months. There were 993 airport closures across Russia in August, a roughly fivefold jump from half a year earlier

Ukraine’s long-range drone strikes are inflicting pain on some of the most strategic sectors of the Russian economy. The costs are adding up.

By pounding refineries, shipping terminals and e-commerce warehouses, Ukraine is using economic pressure to weaken its larger foe and push Moscow to end the conflict. Russian President Vladimir Putin has declared that the strikes won’t change his military aims, and Russia has hit back with its own ruthless drone strikes. 

The Ukrainian effort is being felt by ordinary Russians—many of whom were previously shielded from the war’s consequences. The broader economy was already slowing after an earlier wartime boom.

Here’s how Ukraine’s attacks are disrupting business in Russia.

Energy 

The most damaging aspect of Ukraine’s drone campaign has been its targeting of oil refineries, which led to fuel shortages and rationing measures over the summer. One of the hottest new smartphone apps in Russia is a crowdsourced tool to help drivers locate gas stations with available fuel.

Russia’s refinery industry processed 3.8 million barrels of oil a day in August, a sharp drop from the 5 million barrels a day it handled the same month last year, according to Energy Aspects, a data and analysis firm.

To ease the crisis, Russia began importing gasoline from as far away as India—an ironic move for one of the world’s biggest crude producers. It also loosened fuel-quality standards to allow more supplies from second-tier, Soviet-built refineries and banned diesel exports.

Official Russian government statistics show the price of gas is up 19% this year and recently resumed climbing after a dip in August.

The run-up has confounded efforts by Russia’s central bank to curb inflation, which is running at about 6% annually, above its 4% target. 

E-commerce

Ukraine has carried out more than 30 strikes since July on logistics hubs used by Wildberries or Ozon, Russia’s two largest e-commerce companies. The attacks set off raging fires at some of the warehouse complexes, imperiling the businesses of thousands of third-party vendors who sell goods over the popular online platforms.

Entrepreneurs posted tearful videos on social media to plead for help after their inventory was torched. The attacks have caused more than $10 billion in damage to infrastructure and goods, and will result in at least $12 billion in lost sales over the next 12 months, according to estimates from Data Insight, a Moscow-based research firm.

Putin has pledged government help for Wildberries vendors. The Russian leader has begun to acknowledge the costs of Ukraine’s strikes. Last week he put total losses from Ukraine’s campaign against economic infrastructure at 1% of Russia’s gross domestic product—equivalent to around $25 billion—while playing down such costs as “not critical for us.”

Banking 

Тhe attacks on the e-commerce sector have fueled worries about potential knock-on effects on Russia’s banks, especially state-owned VTB, a major lender to Wildberries and its vendors. 

Analysts estimate Wildberries owes $6 billion to $7 billion to VTB. While that accounts for a relatively small slice of VTB’s loan book, jitters over Wildberries have contributed to a selloff in VTB’s shares on the Moscow Exchange. The bank’s share price has slumped more than 25% this year and hit an all-time low in late August. VTB and Wildberries didn’t respond to requests for comment.

Russians have shown a growing preference for holding cash this year, a shift that could threaten the banking sector if it continues. In the second quarter, individuals withdrew more from banks than they deposited in them, a reversal from past patterns, according to Russia’s central bank.

The central bank linked the shift to disruptions of online payments caused by mobile-internet outages. It didn’t spell out what caused many of those outages: Ukrainian drone incursions, which often led officials to pull the plug on internet coverage as a preventive measure.

Agriculture

Starting in July, Ukraine effectively shut down the main corridor for Russian exports of wheat, barley and other crops with a series of strikes on export terminals and cargo vessels on the Black Sea and the neighboring Azov Sea. 

Russian wheat exports fell more than 50% in August from the same month last year, sinking to their lowest level since 2010, according to SovEcon, an agricultural consulting firm.

The blockage has led to a domestic glut, depressing prices for Russian farmers, even as global wheat prices are near a three-year high. The governor of Russia’s breadbasket Rostov region declared a state of emergency in late August, citing the disruption to local agriculture.

“It’s an unprecedented scenario,” said Andrey Sizov, managing director of SovEcon. He predicted a wave of farm bankruptcies in Russia in the coming months.

Aviation

Frequent travelers to Russia say the disruption to civil aviation is one of the most noticeable results of the Ukrainian campaign. 

Airports routinely shut down for hours at a time when drones are detected nearby, forcing flight delays and cancellations. There were 993 airport closures across Russia in August, a roughly fivefold jump from half a year earlier, according to figures from aviation-security firm Osprey Flight Solutions.

Kyiv has signaled that it could squeeze Russian aviation further. Ukrainian President Volodymyr Zelensky said Tuesday that Russia’s airspace “will effectively be closing” due to drone activity, a warning to the largely non-Western airlines that still service Russian airports and their insurers.