Naval drones vs Russian ships. One more point for the home team.
About the non-military impact of the recent attack of Ukrainian naval drones on the Russian landing ship and chemical tanker.
On the night of August 3 to 4, the Russian landing ship Olenegorsky Gornyak was struck by a Ukrainian naval drone near the port of Novorossiysk. The very next night, the chemical tanker SIG [RU] was targeted by another drone near the Kerch Bridge. No one was injured, but both ships are currently disabled. It is important to note that the attack on the tanker caused no ecological damage because the hole was punched in the area of the engine room. However, the main results of this operation go beyond damaging two Russian vessels actively involved in military supply chains.
The Black Sea is an important artery for not only Ukrainian but also Russian exports, including crude oil and agricultural products. Therefore, reducing export revenue will make it harder for the Kremlin to finance military expenses. Moreover, as the Institute for the Study of War points out, this attack may contribute to a larger effort to demolish Russian logistics and thus support the Ukrainian counteroffensive [1].
The Boomerang Effect
After pulling out of the Black Sea Grain Initiative [2], which allowed for the safe maritime transportation of Ukrainian agricultural products, Russia has intensified its attacks on Ukraine’s port infrastructure in order to prevent the export of its products through the Black Sea. Furthermore, the Kremlin stated that it will consider all ships heading to Ukrainian ports as military targets. Given the fact that this maritime route was a crucial artery for the export of Ukrainian grains, its blockade by Russia is undoubtedly a significant problem for Ukraine and many other countries that rely on Ukrainian agricultural products.
In response to these aggressive actions by Russia, Ukraine issued a warning notice on August 4 about the military threat in the waters of the internal and external raids of the Russian ports of Anapa, Novorossiysk, Gelendzhik, Tuapse, Sochi, and Taman. Despite the loss or damage of almost two dozen ships, including the flagship of the Black Sea fleet, the cruiser “Moskva,” Russia expectedly ignored this warning.
Although recent attacks by Ukrainian naval drones may not prevent Russia from using trade routes in the Black Sea, they should increase transportation and other related costs, thereby intensifying the previously imposed sanctions pressure. Consequently, the Kremlin became so obsessed with attempts to isolate Ukraine from its export markets that it found itself in a situation that jeopardizes its own crude and agricultural exports. Boomerangs have a tendency to return.
Why are the Black Sea routes important for Russia?
Russia exports up to 20% of its crude oil through the Black Sea, so a significant portion of its shipments will likely face higher insurance costs. Due to the price cap on Russian oil, there will be limited flexibility to offset the corresponding cost increase with a price hike. Of course, Russia is highly likely to continue attempting to circumvent sanctions on its energy exports, but now they will definitely need to try much harder, especially since Ukrainian naval drones appear to be demonstrating improved capabilities with each new strike.
In general, it is difficult to fight with legal instruments against a country that has committed an illegal act of aggression against another country (and has done so not for the first time) and is obviously ready to commit any other violations of international law, so Ukraine’s new strategy may prove to be a very effective addition to the sanctions pressure.
Russian fiscal holes
Russia’s budget deficit in the first seven months of 2023 has surged to $29.3 billion or 1.8% of GDP, according to the preliminary estimates of the country’s finance ministry. This is not a big deal for a country with access to global capital markets, sound public finances, and unrestricted external trade capability. However, none of these currently applies to Russia. Affected by sanctions, its revenues from oil and gas were 41.4% lower in January-July 2023. Meanwhile, its defense spending target for 2023 exceeds $100 billion, accounting for a third of all public expenditure [3].
What is known about damaged vessels
According to the media, the tanker SIG was used to supply aviation fuel for the Russian military in Syria, which led to its inclusion in the US sanctions lists. The recent misfortune of this sanctioned tanker serves as a strong response to skeptics who claim that sanctions are an ineffective tool.
The landing ship Olenegorsky Gornyak was used to transport military personnel and cargo from Russia to occupied Crimea following the Ukrainian attacks on the Kerch Bridge, as reported by the Ministry of Defense of Great Britain [4].
Therefore, both ships were legitimate targets. In total, Ukraine has already sunk or damaged 18 Russian ships in the Black Sea since the start of this war. Not bad for a country with close to no fleet at the moment.
Market reaction
Of course, the attack on the Russian tanker has spurred some minor ‘market jitters’, but oil prices have not reacted much to this event. The markets are currently more concerned with the projections of demand from the world`s largest economies, i.e., the United States and China.
Despite the risk of new drone attacks, Russia will still have to continue exporting crude oil through the Black Sea to finance its war expenses. However, its profit margins are expected to decline due to the anticipated increase in transportation and other related costs. The price for Russia’s Urals crude oil has already reached $60/b, a price ceiling imposed by the US-led G7 coalition. Unfortunately, there is mounting evidence of potential violations of this price cap, particularly at Russia’s Pacific port of Kozmino [5]. However, the price of Russian crude is influenced by the decision of Saudi Arabia and Russia to reduce their crude output by 1 million b/d and exports by 500,000 b/d respectively in August 2023 [6].
Therefore, this drone asault had no lasting impact on crude oil prices worldwide.
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References:
- ISW. RUSSIAN OFFENSIVE CAMPAIGN ASSESSMENT, AUGUST 5, 2023.
- UN. Black Sea Grain Initiative Joint Coordination Centre.
- Darya Korsunskaya and Alexander Marrow. Russia’s budget deficit in year-to-date widens to 1.8% of GDP.
- UK MoD. Latest Defence Intelligence update on the situation in Ukraine — 05 August 2023.oD Latest Defence Intelligence update on the situation in Ukraine — 05 August 2023.
- Elina Ribakova, Benjamin Hilgenstock, and Guntram B. Wolff. The oil price cap and embargo on Russia work imperfectly, and defects must be fixed.
- Robert Perkins and Luke Stuart. Russia’s Urals crude hits $60/b price cap as OPEC+ output cuts bite.
