How much damage can Russia’s fuel crisis do to the economy?

Ukrainian drone strikes have pushed Russia into a fuel crisis, and its consequences are already being felt across the economy: inflation is accelerating, industrial output is slowing, and the country’s GDP is sinking deeper into stagnation. But the scale of the damage depends directly on Ukraine’s ability to sustain the intensity of its drone campaign.How much could prices rise?Rising gasoline prices, driven by Ukrainian strikes on Russian oil refineries, have pushed inflation higher. Monthly inflation in June accelerated to 10.6% on a seasonally adjusted annualized basis, up from just 2% in May, according to Russia’s central bank’s estimate. That trajectory threatens to drive up freight delivery costs, which in turn get passed on to the price of nearly every consumer good.But sharply more expensive fuel is a one-time, volatile factor. How much it ultimately affects inflation and production will depend on how long Ukraine’s armed forces can sustain — or intensify — the pace of strikes on Russian refineries.Analysts surveyed by Russia’s central bank in July have already raised their forecasts — for annual inflation at end-2026, to 6.2% (up 0.9 percentage points from the June survey), and for the key interest rate across the entire forecast horizon: to 14.5% annually (up 0.4 percentage points) in 2026, 12.2% in 2027, and 10% in 2028.The effect of the fuel shock — measured as the difference between forecasts before and after refining capacity began dropping out — will amount to roughly plus 1 to 1.5 percentage points added to annual inflation, the chief economist at a Russian analytical center told Meduza. The next question, he said, is what the forecast itself assumes about future capacity losses. “If more capacity drops out than has already dropped out, the effect [on inflation] could easily be larger,” he said. “My estimate is 6.5 to 7% [by year-end] in a relatively calm scenario, where there will be imports, repairs, and most of the surviving capacity doesn’t go offline.” The key rate, he predicted, would see “one or two cosmetic cuts in a positive scenario and [remain] unchanged in any other scenario through the end of the year.”Russia’s central bank’s next meeting on the key rate — currently at 14.25% — is scheduled for July 24. At that meeting, the regulator will also update its economic forecast, and a downward revision looks all but inevitable given current conditions.Who is suffering most from the crisis?Russia’s civilian economic sectors are in acute need of a significant easing of monetary policy: two-thirds of corporate loans carry floating interest rates, Russia’s central bank reported in its latest financial stability risk review. That means a rate cut automatically reduces companies’ interest payments, while holding or raising the rate keeps debt-servicing costs at current levels or pushes them even higher.By early 2026, Russian businesses’ debt burden had climbed to a troubling peak not seen since the COVID-19 pandemic, the central bank noted in the same review.It is the non-military economy that suffers most from a double-digit rate and its slow decline — we have written about this repeatedly; military industries receive priority subsidies from the government — and officials have been trying to convey this to Vladimir Putin. Last week, Yakutia Governor Aisen Nikolaev did so publicly. In response, Putin said that cutting the key rate would be “a natural process, based on macroeconomic indicators and economic stability.”In early June, Putin said he constantly listens to the debate between the government and Russia’s central bank over the pace of rate cuts. “We deliberately chose to cool the economy. We don’t want hyperinflation,” he said at a meeting with representatives of international news agencies.Why can’t Russia’s central bank help the economy?Russia’s central bank Deputy Governor Alexei Zabotkin, who oversees monetary policy, explained even before the fuel crisis escalated in June that the regulator cannot cut the rate faster because of high budget expenditures that are driving inflation amid an economic slowdown and elevated inflation expectations.The fuel crisis is a supply shock — specifically, a shock to gasoline production at Russian refineries as a result of Ukrainian strikes. Russia’s central bank cannot use the rate to directly influence rising gasoline prices caused by a shortage, the bank’s analysts explained. “Monetary policy should respond only to the supply shock’s possible influence on price growth through secondary effects, above all through rising inflation expectations,” they wrote in the July issue of their bulletin O chem govoryat trendy “What the Trends Are Saying.”At the same time, Zabotkin said, the regulator cannot simply “turn a blind eye” to fuel prices and inflation expectations, but is counting on the government to normalize conditions in the fuel market through government efforts. “With a well-calibrated monetary policy, Russia’s central bank will still be able to ensure a return to the 4% inflation target in 2027,” Zabotkin said on Russia’s central bank’s official channel.Pressure on Russia’s central bank to cut the key rate faster has intensified particularly amid slowing GDP growth after two years of overheating fueled by unchecked military spending. But it was not the regulator that pushed the situation to its current limit. On the contrary, Russia’s central bank’s rapid-response measures in 2022, along with the construction of a resilient financial system over the previous decade, prevented a dangerous financial crisis and a collapse in Russians’ purchasing power — while simultaneously keeping the Kremlin’s war machine running for years to come.Next year, Elvira Nabiullina’s third and, by law, final term as governor of Russia’s central bank expires. Who will take her place is a critical question in a system where everything depends on one resource: the president’s personal trust.As The Bell reported, it is precisely Nabiullina’s personal relationship with Putin that has all these years protected Russia’s central bank and its team, and allowed it to carry out, for example, a cleanup of the banking sector that many powerful figures — including security service officials — strongly opposed.The regulator is formally independent and accountable only to parliament, but real independence for Russia’s central bank is guaranteed solely by Putin. “He trusts Nabiullina very much,” a person who knows her told The Bell. It suits Putin to keep an independent central bank governor as a shield: when business allies from the real sector ask for cheap credit, he can suggest they first work it out with her.But if Russia’s central bank’s independence rests on one person — Nabiullina — and on Putin’s trust in her, then her likely departure puts at risk not just institutional continuity, but the entire architecture of Russian economic stability.With overall inflation remaining high because of fuel costs, the economy is sliding into recession, according to the business climate indicator, economist Viktor Tunev warned in his Telegram channel Truevalue. “And that is reason to be more cautious about the severity of monetary policy,” he wrote. The pass-through of fuel costs into prices will happen, he said, but it is a one-time factor, like the VAT increase.What else is causing alarm in the Russian economy?Alongside the risks to inflation, the fuel crisis is dragging down industrial output through two channels simultaneously — a slump in petroleum product manufacturing (the largest sector of the processing industry) and a decline in crude oil extraction.Oil production statistics have been classified since 2023, but in early June Deputy Prime Minister Alexander Novak, who oversees energy in the government, acknowledged that oil output is falling due to “unscheduled repairs” at refineries. In June, the decline in refinery output may have reached 20 to 25% year-on-year, according to estimates from international and Russian experts. According to Energy Intelligence’s estimate, Russian oil refining in June collapsed 25% year-on-year, to 3.91 million barrels per day — the lowest level in more than 20 years.Russian industrial output fell 0.7% year-on-year in May, according to Rosstat data, after growing 1.9% in April. Military production will likely be unable to keep overall industrial output in positive territory in June and July.A serious (on the order of 30 to 35%) and sustained shortage of gasoline — if Ukraine’s armed forces continue striking refineries, fuel depots, tankers, port terminals, and so on with similar success — could push the Kremlin to take another step toward a mobilization economy, economic commentator Boris Grozovsky argued:The logic of such an economy is precisely this: 1) there is a scarce resource; 2) that resource is urgently needed for the front, for victory (in Zaporizhzhia, the Rostov region, and so on) — there is no way to deliver everything necessary to the front line; 3) if supply cannot be increased, let’s ration consumption so the military doesn’t go without. And so emergency services — ambulances, fire brigades — don’t go without either. Everyone else gets whatever is left over. What happens to civilians in the meantime, and what their mood will be, nobody gives a *** (except the presidential administration and the governors, whose jobs are becoming firing-squad positions as discontent grows).The question, in Grozovsky’s view, is how far the Kremlin will want and be able to squeeze the civilian economy to keep the front supplied, in a scenario of sustained acute gasoline shortages — and whether it will even work when both sea and overland supply routes are effectively within range.The intensity of Ukrainian strikes depends, on one hand, on drone production volumes: the company Firepoint, whose FP-1 drones have struck Moscow, produces more than 100 such drones per day, of which about 10% reach their targets, Sergei Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center in Berlin, said. On the other hand, it depends on how quickly Russia can repair its refineries and how much firefighting and repair capacity remains at installations that have been struck repeatedly.At Meduza, we are committed to transparency about our use of artificial intelligence in the newsroom. The story you’re reading was written by one of our living, breathing journalists and translated from Russian using an AI model configured to follow our strict editorial standards. This translation process is the result of extensive testing and refinements to ensure our English-language coverage is timely and accurate. A Meduza editor reviews every draft before publication.If you find any errors in this translation, please contact us at [email protected].To read Meduza’s exclusive content in English, please subscribe to our newsletter.Yulia Starostina