Russian oil refineries, terminals burn as Ukraine hits Putin's war economy

MOSCOW (Reuters) -Ukraine has stepped up drone attacks on Russian oil refineries and exporting infrastructure, striking the most important sector of President Vladimir Putin's economy to show it can fight back as the United States seeks to broker a peace deal.

The attacks disrupted Moscow's oil processing and exports, created gasoline shortages in some parts of Russia and came in response to Moscow's advances on the front lines and its pounding of Ukraine’s gas and power facilities.

Kyiv's move is an attempt to raise the stakes in possible peace talks and challenge the idea that Ukraine has already lost the war after U.S. President Donald Trump and Putin met in Alaska this month, analysts have said.

Ukrainian attacks on 10 plants disrupted at least 17% of Russia's refinery capacity, or 1.1 million barrels per day, according to Reuters calculations.

The drone war has pushed more crude towards exports from the world's No.2 oil exporter at a time Washington is pressing China and India to reduce purchases of Russian oil.

The refinery hits come as Russia's seasonal demand for gasoline from tourists and farmers peaks. 

Russia had tightened its gasoline export ban in July to deal with a spike in domestic demand even before the attacks.

There were shortages of gasoline in some areas of Russian-controlled Ukraine, southern Russia and even the Far East, forcing motorists to switch to more expensive petrol due to shortages of the regular A-95 grade.

"We will endure, but this is a big hit to our family budget, a big hit. It's really noticeable," said Svetlana Bazhanova, a resident of Sevastopol, the largest city in Crimea which Russia annexed in 2014.

TOURISM DEMAND

Russia's far eastern port of Vladivostok saw long car queues at gasoline stations, according to a Reuters reporter. The shortages are due to a seasonal influx of tourists, local authorities said.

The affected refineries have lost only part of their capacity but this could still create problems with domestic fuel supplies, said Sergei Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center, who previously worked at Russian oil major Gazprom Neft.

Russia relies on oil and gas exports for a quarter of its budget revenues, which are funding a 25% rise in defence spending this year to the highest levels since the Cold War.

Western sanctions have forced Moscow to sell oil at discounts and stop gas sales in most of Europe. This has not deterred Moscow from producing record numbers of artillery and weapons, according to U.S. military generals.

The war in Ukraine has become a battle of attrition with both Russia and Ukraine using drones and missiles to strike far behind the front lines to damage each other's economies.

So far, Russia's economy has coped with the sanctions but growth has slowed raising concern in the Kremlin.

In the past month, Ukraine has attacked Lukoil's Volgograd, Rosneft's Ryazan and a host of other plants in the Rostov, Samara, Saratov and Krasnodar regions. 

A fire at Russia's Novoshakhtinsk refinery was still burning on Monday after a Ukrainian drone strike. 

Ukrainian drones also attacked the Druzhba pipeline and Novatek's Ust-Luga export terminal and fuel processing complex on the Baltic.

(Reporting by Reuters in Moscow; Writing by Guy Faulconbridge; Editing by Sharon Singleton)