Fuel shortages in Russia may achieve what nothing - and nobody - else could: force Putin to the negotiating table

Queues for fuel are now common across Russia - and public unrest over the shortages is increasingly vocal.

Russia's oil refineries are burning as Vladimir Putin's war on Ukraine is now being deeply felt domestically. An analysis in the Financial Times suggests that, so far this year, long-range Ukrainian drones have struck Russian targets, primarily in European Russia, 194 times. That number is accelerating.

On Monday, the Ukrainians successfully attacked Russia's largest refinery - responsible for 8% of national capacity - in Omsk, some 2,500 kilometers from the border.

The ramifications of the fuel crisis are already showing up in asset prices.

The disruptive impact on the $1 trillion Russian bond market of what Ukraine's president has called a "40-day influence operation" has been severe. Yields on Russian 10-year government bonds have jumped almost 200 basis points since the start of June to 16.62%. This reflects not just the inflationary impact of surging energy prices but also heavy debt issuance to fund the war in Ukraine, launched by Putin in February 2022.

Russian bond yields are reacting to inflationary pressures and the costs of waging a war that began in February 2022.

Russian financial assets are, for the vast majority of international investors, prohibited from a legal standpoint and impossible from an operational perspective. The U.S. Office of Foreign Assets Control (OFAC) has banned investors from trading Russian debt, while the world's largest clearing houses, Euroclear and Clearstream, have frozen all links to the Russian National Settlement Depositary.

The main players in Russian fixed-income markets, then, are domestic institutions that are limited as to where they can invest and perhaps some institutions in "friendly nations" such as Belarus and Kazakhstan.

On Monday Reuters reported that European intelligence agencies had prepared "a note on the probability of a banking crisis in Russia in 2026." Among other factors, the report highlighted that 500,000 Russians went bankrupt last year, that as many as 15% of bank loans were nonperforming - and that that number is likely to increase. The risk to Russia's financial system, according to the document, is "explosive."

The economic disruption and the social mayhem this Ukraine campaign within Russia's borders has inflicted threatens the Kremlin's capacity to sustain its war effort as it stretches well into its fifth year. This may prove to be the coercive factor that finally gives Putin no alternative but to come to the negotiating table and end the war.

The implications of a peace deal for global markets should not be underestimated. It would likely mean lower energy prices (BRN00), especially in Europe, a huge rebuilding program in Ukraine and a lower cost of energy applied to European stocks XX:SXXP, according to a report in May from Morgan Stanley's European equity team led, by Maria Zavolock.

The U.S.-funded news organization Radio Free Europe/Radio Liberty estimates that a quarter of Russia's fuel-production capacity has been lost in the last 12 months and that two-thirds of its regions have now placed restrictions on the sale of fuel. Large lines of vehicles at gas stations, many of which have depleted supplies, have been forming for over a week now, and many Russians have been forced to flee the contested peninsula Crimea completely owing to fuel and energy shortages there.

Ukrainian attacks on Russia's energy infrastructure is crippling the distribution of fuel, leading to shortages and higher prices.

In an article published on Substack, Mikhail Khodorkovsky, for many years Russia's top oil tycoon and now a leading opposition figure, explained why the damage to the refining industry is so severe. The breakdown isn't simply a function of reduced refinery output. For a short period, at least, Khodorkovsky thinks Russia could buy the volumes abroad and import, he wrote.

The key for Khodorkovsky is logistics and the government's decision-making processes. If the government were to free prices completely, then fuel would flow quickly where it was most in demand. Politically, however, much higher fuel prices would be unacceptable for the Kremlin.

The state could also coordinate logistics more efficiently to move fuel among regions, but Khodorkovsky wrote that he doesn't feel the state is capable of organizing that, citing corruption.

The path chosen so far by the Putin government has been to cut fuel standards to a grade called "Euro-2," so poor that it was actually banned in Russia in 2013 and destroys the catalytic converters in cars.

The nightmare scenario for the Kremlin, though, Khodorkovsky pointed out, is that if refining capacity is halved by Ukrainian strikes then the crisis would shift from a gasoline crisis to a diesel crisis, and Russia's harvest season is just about to start.

John Lough, senior research fellow at the foreign-policy think tank New Eurasian Strategies Centre and formerly a senior manager at TNK-BP, a joint venture (UK:BP) $(BP)$ that ranked among Russia's largest oil companies, emailed MarketWatch to caution that predicting the timing or probability of the Russian economy's grinding to a halt represented "an impossible question to answer."

This is because it's difficult to calculate how long the Russian authorities will need to import refined fuel and whether the Ukrainians can hit refineries faster than Russia can repair them.

In Lough's opinion, "it would take six months or more for a deep systemic crisis to take grip."

-Jules Rimmer

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July 07, 2026 07:56 ET (11:56 GMT)

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