At first glance, the premise that oil refinery owners benefit from Ukrainian drone attacks on their own facilities sounds like an absurd conspiracy theory. Fires, destroyed distillation columns, halted production lines, and billions in repair losses amid a sanctions-induced equipment shortage all seem like a devastating blow to the business.
However, the privatization of Soviet industry in the 1990s, the laws of the Russian commodities economy, and the specific nature of state regulation during Vladimir Putin’s rule have created a unique paradox. The current system of state administration and ownership of large state and private corporations has enabled large vertically integrated oil companies (VIOCs) to not only minimize the damage from these attacks but also find ways to extract colossal financial benefits from the crisis.
1. A Windfall of Subsidies: The Fuel Damper and Reverse Excise Duty
The main source of the oil companies’ paradoxical earnings in this crisis is the state subsidy system, specifically the fuel damper mechanism and the reverse excise duty on oil.
The damper mechanism was designed to keep domestic fuel prices at Russian gas stations in check. If global prices for petroleum products are higher than the conditional domestic benchmark, the state pays the oil companies the difference out of the federal budget, making it profitable for them to sell fuel domestically rather than exporting it.
When drone strikes cause gasoline and diesel production to drop (for instance, following a wave of strikes, Russian gasoline production and refining slumped by 20–25% in some places), a deficit emerges in the domestic market. Wholesale prices on the St. Petersburg International Mercantile Exchange (SPIMEX) instantly skyrocket. The surge in exchange prices automatically triggers a formula by which the state sharply increases its payouts to the companies.
According to financial reports, during the spring months alone, the government paid oil companies massive sums in compensation and reverse excise duties—totalling hundreds of billions of rubles (roughly $10 billion in aggregate). Thus, the drop in actual production is offset by a direct redistribution of funds from the state budget into the pockets of oil magnates.
2. Exporting Crude Oil Instead of Cheap Refining
For the owners of VIOCs (Rosneft, Lukoil, Gazprom Neft, etc.), domestic oil refining in Russia has long been more of a social obligation and a low-margin burden than a highly profitable business. It is far more lucrative to sell crude oil abroad.
When a Ukrainian drone knocks out a primary processing unit (such as an AVT-6), the refinery physically cannot process crude. Where does this raw material go?
- It is rerouted to ports (Novorossiysk, Primorsk, Ust-Luga) and exported in its crude form to India, China, and other nations.
- Selling crude oil on the shadow or legal global market frequently yields «fast» dollars and yuan, freeing companies from the need to spend on complex logistics, refining, and marketing cheap fuel inside the Russian Federation.
3. Artificial Deficits and Rising Retail Prices
Any supply crisis serves as a pretext to revise prices. Due to damage at major plants (such as the Moscow Refinery, plants in Tatarstan, and in the south of the country), the fuel supply drops while summer demand remains high.
Refinery owners use this argument as perfect leverage over the government to achieve two goals:
- Lifting Restrictions: Companies successfully lobby for the loosening of environmental standards (for example, receiving permission to produce lower-quality Euro-3 or Euro-2 gasoline, which is cheaper to manufacture).
- Price Hikes: Under the pretext of «needing to find funds for costly repairs,» they lobby for increases in wholesale and retail prices at gas stations. A price hike at the pump of even 1.5–2 rubles per liter generates billions in additional revenue for gas station chains, easily covering the cost of purchasing new parts.
4. Insurance Payouts and State Incentives for Modernization
Although the insurance market has begun tightening its rules amid increasingly frequent attacks (even attempting to exclude «downtime due to UAV strikes» from standard insurance packages), large state-owned and state-aligned conglomerates receive direct financial assistance from the Ministry of Energy and the Ministry of Finance.
Drone strikes place any destruction squarely into the category of force majeure. This allows refinery owners to:
- Legally shift modernization deadlines set by the state without paying fines for refineries that were built back in the Soviet era and privatized for next to nothing.
- Demand subsidized loans, subsidies, and zero tariffs on the import of scarce equipment (which has to be purchased by bypassing sanctions through third countries at inflated prices), thereby solving the problems brought on by the war and Western sanctions.
Summary: A Tragedy for Some, a Damper for Others
For the average consumer and the state, strikes on refineries represent a net loss: shortages at gas stations, the threat of fuel rationing (limits on fuel distribution in the regions), and the depletion of the federal budget.
However, for top management and the owners of oil corporations, this situation has turned into a win-win lottery. The plant stands idle—but crude oil is exported for foreign currency. Fuel is scarce—but its price is rising. Volumes have dropped—but the state compensates for this with giant damper tranches. In a warped war economy, the destruction of infrastructure has become just another legal way for oligarchs to maximize profits at the expense of the state budget and the pockets of ordinary car owners.
There is another critical factor: government officials end up as the primary beneficiaries of these strikes. It is they who authorize the corporate reimbursements, shield the companies from their unwillingness to protect their own properties (which are often obsolete and in dire need of repair and modernization), ensure the legality of new prices, and protect them from investigations and charges. In return for all of this, they take their own cut of the revenues.
