The Ripple Effects of The Petrol Crisis: What it means for the Russian economy

Inflation – visible and invisible

The first and most obvious consequence of the crisis has been a surge in inflation. After two months of unusually subdued price growth for the spring season, the sharp increase in petrol prices has driven inflation markedly higher.

According to Rosstat data, petrol prices rose by 6.9% in June compared with May, followed by a further increase of 2.1% in the first week of July. Weekly price increases during June generally ranged between 1% and 3%. Diesel prices increased by 6.7% over the month and by a further 3.4% during the first week of July. The average retail price across the main fuel grades reached 74.01 roubles per litre at the beginning of July, up from 72.38 roubles a week earlier, according to Rosstat.

However, in a purely economic sense, Rosstat's figures should be regarded as only a partial measure of the increase in fuel prices. Petrol prices in Russia are not determined by the market. Instead, they are regulated under a special agreement between the government and oil companies, whereby the state compensates producers through the so-called damping mechanism in return for limiting wholesale price increases to the rate of inflation. When supply contracts sharply, as it has following Ukrainian attacks on Russian refineries, regulated prices produce a familiar phenomenon inherited from the Soviet era: shortages. Petrol remains available at officially recorded prices that are only around 7% higher, but there is less of it than consumers require. Motorists therefore pay an additional, unrecorded price through their time, whether by queueing at filling stations or driving long distances in search of available fuel. Those unable or unwilling to bear these costs simply go without. This is how demand is rationed under conditions of administratively suppressed prices.

Economically, shortages represent a form of hidden inflation. Filling stations operated by independent retailers, which are not part of the major vertically integrated oil companies and are therefore not bound by the government's pricing agreement, are already charging substantially higher prices. For example, at filling stations operated by the Neftmagistral chain, which has 105 sites in Moscow and the surrounding region, prices in early July were approximately 20-25% above the levels recorded by Rosstat. In some regions,prices for AI-92 petrol exceeded 100 roubles per litre in some areas, reaching as high as 110-115 roubles, while AI-95 sold for 130-140 roubles per litre, according to reports from the field corroborated by a Reuters review. However, the government is also seeking to keep prices in check at independent petrol station chains through threats and other coercive measures, according to media reports. Were these restrictions removed, fuel prices would almost certainly rise by several tens of percentage points, while queues at filling stations would disappear.

This also implies that Rosstat's inflation statistics understate the true increase in the cost of living. According to the agency, consumer prices rose by 0.87% in June, following increases of just 0.17% in April and 0.14% in May. Even taken at face value, this represents a very high monthly reading, equivalent to annual inflation of around 11-12% if sustained over a full year, or approximately 11.5% according to estimates by the MMI channel. At the same time, fuel accounts for roughly 4.5% of Rosstat's consumer basket. A 7% increase in fuel prices during June therefore contributed around 0.31 percentage points to monthly inflation, more than one-third of the total increase. Had fuel prices been fully market-determined and risen by 15-30%, which appears entirely plausible under prevailing conditions, monthly inflation would instead have reached approximately 1-1.5%.

The gap between official and market-clearing prices has effectively been paid by Russian consumers in the form of time spent queueing. However, fuel prices also feed into inflation through a second channel: higher transport costs. Rising fuel costs increase the price of freight services, which are then passed on through the prices of virtually all goods. Transport companies are forced to incorporate not only the nominal increase in fuel prices but also the additional costs associated with obtaining fuel, including delays, longer routes, overpayments and other operational inefficiencies. Consequently, the fuel component embedded in freight charges and ultimately in consumer prices is likely to reflect something much closer to the market-clearing price of fuel than the officially recorded retail price. The inflationary impact is therefore almost certain to exceed what might be inferred from Rosstat's headline inflation figures alone.

Kommersant’s market sources say that some freight operators had already increased tariffs by 5-10% by the end of June, while others have extended delivery times or temporarily held back orders as they assess the new cost environment. The full extent of these adjustments is likely to become clear only once July data are available, together with the broader secondary inflationary effects of both visible and hidden increases in fuel prices.

Finally, another channel through which the fuel shock is likely to be transmitted is the agricultural sector, where fuel typically accounts for between 10% and 20% of production costs. Most experts do not currently expect severe fuel shortages during the harvest season, but they do anticipate that higher fuel costs will reduce profitability and ultimately raise food prices. These inflationary pressures are therefore likely to become more visible towards the end of the summer and into the autumn, as produce from the new harvest reaches retail markets.

Thus, the fuel shock is likely to spread through the Russian economy in several stages, transmitting not only the effects of officially recorded price increases but also the inflationary pressures concealed behind administratively induced petrol shortages.

Moreover, motor fuel serves as one of several key reference prices, alongside staple goods and essential services such as bread, milk and utilities, that households and businesses use to gauge overall price dynamics and form inflation expectations. As discussed at the Central Bank’s Board of Directors meeting in late June, these expectations are themselves becoming an increasingly important source of inflationary pressure.

A trigger for industrial decline

The crisis in the Russian oil refining sector will also have a significant impact on Russia's industrial production. Petroleum refining is both an essential infrastructure industry and the country's largest manufacturing sector. It is also Russia's second-largest industrial industry overall, after crude oil and natural gas extraction. It accounts for 17.6% of manufacturing output and around 9% of total industrial production, giving it a decisive influence on aggregate industrial performance.

Meanwhile, as early as May, according to Rosstat data, oil refining output had already fallen by 13.5% compared with last year’s levels. This implies that the sector alone reduced overall manufacturing growth by 2.4 percentage points and total industrial production growth by 1.2 percentage points. It is therefore striking that Rosstat still reported manufacturing output growth of 0.5% for May. This suggests that, excluding petroleum refining, manufacturing output would have expanded by almost 3%.

However, according to Rosstat’s calculations, industrial production as a whole still contracted by 0.7% in May, according to Rosstat, reflecting a 2.3% contraction in the extractive industries. Although the statistical agency does not publish separate figures for oil and gas extraction, publicly available data indicate that hydrocarbons accounted for most of the decline. In early June, Deputy Prime Minister Alexander Novak, who oversees the energy sector, acknowledged in a conversation with journalists that oil production had fallen compared with the beginning of the year. Russia has been attempting to maximise crude oil exports to offset the loss of domestic refining capacity, but insufficient tanker capacity has prevented it from exporting all surplus volumes, forcing producers to curb output. Estimates of Russian oil production differ across external sources. For instance, according to OPEC figures, in May 2026 production stood at 8.99 million barrels per day (mbpd) and remained unchanged compared with May 2025, whilst according to calculations by the International Energy Agency, the year-on-year decline was 4.7%. Despite these differences, both organisations, as well as the Russian government itself, agree that oil production has been declining relative to the beginning of the year as refining capacity has remained offline.

Expert estimates suggest that the contraction in refining deepened to around 25% in June. According to data from Energy Intelligence, the volume plummeted to 3.95 mbpd, which is precisely a 25% year-on-year decline. A similar level of decline, of 23–25%, is cited by the Kpler agency and Russian market analysts, quoted by Kommersant, as well as Reuters sources in the Russian fuel sector. Meanwhile, experts from the Kyiv School of Economics, quoted by the Financial Times, estimate an even steeper decline of 28%. A contraction of this magnitude would reduce aggregate manufacturing growth by approximately 4.4 percentage points and overall industrial production growth by around 2.3 percentage points. It is difficult to see how continued expansion in defence-related manufacturing could offset losses of this scale. At the same time, there is little reason to expect the gradual decline in oil production to reverse, implying a further negative contribution to overall industrial output.

The refining crisis is therefore having a negative impact on Russian industry through two channels simultaneously: falling production of petroleum products and declining crude oil extraction. As a result, an industrial sector that has already been hovering on the brink of contraction is now highly likely to move into negative territory over the coming months, with industrial output expected to decline in the second quarter despite relatively strong growth of 1.9% in April.

The inflation-credit squeeze

The consequences of the petrol shock for Russia's financial system may prove equally, if not more, significant because of their broader knock-on effects. Ukrainian drone strikes have dealt a substantial blow to Russia's prospects for macroeconomic stabilisation. The resulting acceleration in inflation is likely to force the Central Bank to postpone further reductions in the key policy rate once again.

The situation is paradoxical in several respects. The Central Bank had finally made substantial progress in bringing inflation under control. Annual inflation fell to 5.3% in May, compared with 9.9% a year earlier. Underlying inflationary conditions also remained relatively favourable despite seasonal influences, with core monthly inflation below 0.5%, standing at 0.48% in June. The rise in prices in June, as noted by experts at the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), was concentrated in a limited number of sectors and reflected non-monetary factors. While petrol prices surged, most other sectors continued to exhibit relative price stability, supported by weak domestic demand and the excessive appreciation of the rouble. Nevertheless, the transmission mechanisms through which higher fuel prices spread across the wider economy, discussed above, are likely to leave the Central Bank with little alternative but to maintain a tighter monetary stance.

The repeated postponement of the expected interest rate cuts have become a defining feature of the Russian economy over the past year. As recently as July, and even September, 2025, both market analysts and businesses expected the policy rate to return to single digits by the end of 2026. In September 2025, the likelihood of such a scenario was confirmed by Kirill Tremasov, an adviser to the Central Bank governor. At the start of 2026,expectations had moderated, with a reduction to around 12% by year-end appearing realistic. However, an unexpected fiscal expansion in March and April prompted the Central Bank to adopt a more hawkish position after the government injected another substantial volume of inexpensive budget financing into the economy. Nevertheless, the sharp slowdown in inflation during April and May revived expectations that the Central Bank might accelerate the pace of monetary easing. Those expectations have now been effectively overturned by the impact of Ukrainian drone strikes on Russia's refining sector.

Trends in expectations for key rate cuts, 2025–2026, %

The further postponement of interest rate cuts not only delays the normalisation of credit conditions and the potential recovery of the civilian industrial sector, but, more importantly, further weakens the financial position of the corporate sector and increases the risk of a broader debt crisis. The Central Bank notes in its latest financial stability risk review that around two-thirds of corporate lending is issued at floating interest rates. Monetary easing would therefore automatically reduce companies’ debt servicing costs, while the continued delay in rate cuts prolongs the period of elevated borrowing costs and further increases the financial burden on businesses.

This comes at a time when corporate financial performance has deteriorated noticeably across the economy during the first half of 2026, further reducing companies’ ability to service their debt. The greatest vulnerabilities are concentrated among loans and debt restructurings that were undertaken on the assumption that interest rates would begin to fall during the summer and autumn of 2025. In these cases, the gap between expected and actual borrowing costs has widened to as much as 4-5 percentage points.

According to the Central Bank’s assessments, financial risk indicators remain moderate. However, as it acknowledges, this assessment largely reflects an ongoing wave of loan restructurings and the ‘slower recognition by banks of losses on large corporate loans’ (see also → Re:Russia: A Cat in The Bank). The debt burden of the largest companies (measured as net debt to EBITDA) have continued to increase and have almost returned to their pandemic peak, rising to 2.2x compared with 2.3x in 2020.

Among Russia's largest companies, whose combined annual revenues amount to around 34% of GDP and whose outstanding debt accounts for almost half of all corporate lending, firms unable to service their debts independently represented 9% of total corporate debt at the end of 2025, compared with 8% in the first half of 2025. More strikingly, however, companies classified as financially vulnerable now account for 66% of total corporate debt, up from 59% six months earlier. These firms already face elevated interest burdens and would struggle to service their debt if borrowing costs rise further or operating performance deteriorates. It is precisely this group for which another postponement of monetary easing poses the greatest risk.

However, there are also more pessimistic assessments of the state of the banking sector and the aggregate loan portfolio. According to estimates by the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), Russia is already experiencing a latent banking crisis, reflected in the share of problem assets exceeding the 10% threshold generally associated with systemic banking stress. CMASF argues that conditions deteriorated further during the first quarter of 2026 following another wave of high-risk loan restructurings, the volume of which was around 30% higher than the first quarter of 2025. At the same time, the latent nature of the crisis is linked to the quasi-market nature of Russia's banking system, which allows underlying problems to be concealed while preserving depositor confidence. However, this comes at the cost of preventing the banking sector from performing its normal market functions and contributes to the accumulation of growing financial imbalances.

What next?

The scale of the consequences of the petrol crisis and the crisis in Russian oil refining will ultimately be determined by how long they persist. However, despite optimistic statements (primarily from Vladimir Putin), the Russian authorities appear to have only limited capacity to resolve the situation.

According to sources at Reuters within the Russian oil industry, petrol production by the third week of June had fallen to around 90,000 tonnes per day, approximately 25% below the level recorded in June 2025. Meanwhile, daily demand in the summer reaches, according to another source at the agency, approximately 110,000 tonnes per day. This implies that the petrol shortfall was already close to 18% several weeks ago. The government has attempted to mitigate the shortage by banning exports of all refined petroleum products, including diesel, while simultaneously increasing petrol imports. These measures are likely to alleviate diesel shortages but are unlikely to eliminate the deficit in petrol supplies. Establishing import flows of the necessary scale cannot be achieved quickly. According to another Reuters source in the Russian fuel industry, the government hopes to secure imports of around 400,000 tonnes per month, including supplies from Belarus, equivalent to approximately 13,000 tonnes per day. Even if this target is achieved, it would cover only around two-thirds of the existing shortfall, suggesting that upward pressure on domestic fuel prices will persist.

Some analysts nevertheless expect refinery output to improve during July, at least recovering to the levels observed in May. These expectations appear to be based on planned repairs and the mobilisation of additional domestic refining capacity. Finam analyst Sergey Kaufman asserts that in most cases, repairs to damaged refineries take between two weeks and two months. However, this assumes either effective protection of refinery facilities from drone attacks or an energy ceasefire with Ukraine. At present, neither scenario appears likely. On the contrary, developments point towards further escalation.

According to Re:Russia’s own calculations, the intensity of Ukrainian strikes on Russia's oil infrastructure increased rather than declined during the first half of July. Ukrainian forces conducted 22 confirmed successful strikes on Russian fuel infrastructure in April, including 11 against oil refineries. In May there were 24 confirmed strikes, including 13 against refineries. Bloomberg counted as many as 30 attacks, although several could not be independently verified as successful. In June, there were 20 confirmed strikes, including 11 against refineries. Across the April-June period, this amounted to an average of 22 successful strikes per month, including approximately 12 directed against refineries.

During the first 14 days of July alone, however, Re:Russia recorded 23 successful strikes, including 10 against refineries, implying that the operational tempo had approximately doubled. Targets included repeatedly attacked facilities such as the Ilsky, Afipsky, Saratov and Syzran refineries, alongside new targets, including Gazprom Neftekhim Salavat in Bashkortostan and the Omsk refinery. Around half of all strikes were directed against oil storage facilities and export terminals in Russia's southern regions (including the Krasnodar and Rostov regions and occupied Crimea), indicating that one objective of the campaign is to intensify the disruption of Russian logistics supporting occupied Ukrainian territories.

Taken together, these developments suggest that the crisis in Russia's refining sector is not easing. On the contrary, the available evidence indicates that it has probably not yet reached its peak.

Ukrainian strikes on Russian refineries and oil infrastructure facilities, 2026