Ukrainian attack threatens Russia's gas exports: Is the Baltic turning into a new Strait of Hormuz?
"Putin's Russia is obsessed with safety. Accurate strikes at the crucial fuel and gas infrastructures are therefore like a direct punch to its most sensitive areas," said Dr. Szymon Kardaś, an expert from the European Council on Foreign Relations (ECFR)
Since the beginning of the year, four notable incidents have involved damage to Russian oil infrastructure. The latest occurred on Thursday, when one of the larger refineries in the country, belonging to the Rosneft company in Tuapse, caught fire.
Ukraine's attack on Novatek
Last week, Ukraine attacked one of the major ports in the Baltic and Russia's main LNG terminal in Europe. Drones started a fire at the Ust-Luga port near the Estonian border, deep within Russia. The port sits 528 miles from Ukraine.
"While the attack didn't cause critical damage, it undermines Russian security," states the ECFR expert.
In Ust-Luga, a significant LNG terminal and facilities that blend gas condensate into light and heavy crude oil and ready fuels - diesel oil and shipping fuel components- are being expanded. This is the most important port for exporting crude oil on the Baltic.
The Achilles' heel: one of three major ports
The assault on Ust-Luga carries significant propaganda value. It exemplifies how critically important Russian factories and ports are within Ukrainian attack range.
As a result of the drone attack, the Russian giant Novatek had to halt operations. "The technological process at the Novatek-Ust-Luga terminal has been suspended," Novatek reported. A team was assembled to address the situation, with an assessment of losses to follow.
This is primarily a blow to the image of the company founded by Leonid Michelson, which was intended to be a new "jewel in the czar's crown". Novatek's LNG has for years been a viable competitor to the state-owned Gazprom, favored by the Kremlin. It continues to supply liquid gas to Western Europe - mainly Spain, France, and Belgium.
Ukraine's strike on Russia's gas or oil infrastructure is a bold and strategically justified move. It's an appropriate and painful retaliation to Russian assaults on their critical infrastructure. "Ust-Luga is one of Europe's three most important ports, along with Primorsk and Novorossiysk, which serve to export Urals oil to external markets," emphasizes Dr. Kardaś.
Ust-Luga handles up to 82 million tons of oil per year. Until now, it has been under-utilized. It currently processes about 37.5 million tons per year, a modest increase compared to 2022 (which saw 34.5 million tons) but a significant boost from 2021, when it processed about 18.7 million tons per year. "This is still far below full capacity. This isn’t just Russian export, but also primarily oil transit from Kazakhstan," explains the expert.
However, potential port paralysis could provoke multiple issues for Russia, significantly increase growing costs, and impact the domestic fuel market. The knowledge that one of Russia's more important Baltic ports is within the range of Ukrainian attacks is contributing to increased tension in Moscow. Kremlin spokesman Dmitry Peskov referred to the "brutal face of Kyiv," which "strikes at civilian infrastructure." A state of "high alert" was declared in the Leningrad Oblast.
Ust-Luga and Primorsk ports are responsible for the Baltic export of Ural oil. According to estimates by Bloomberg (based on Kepler data), about 1.5 million barrels of oil pass through these two oil terminals operated by the state company Transneft PJSC, accounting for over 40% of all Russia's maritime exports of crude oil (average from January to November 2023).
"If, due to Ukrainian attacks, Ust-Luga becomes immobilized, Russians would have to redirect exports to other ports, primarily to Primorsk. However, this would involve significant logistical problems and costs," Dr. Kardaś emphasizes.
The threat to Baltic Sea cargo would shake the oil market, much like current occurrences - albeit on a larger scale - in the Red Sea.
Limited options
The main issue would concern the transportation of oil extracted from the western part of Russia to other ports, according to Kardaś.
"The weak link is the pipelines; their capacity is limited, and they also cater to domestic market needs. Part of this transport could be shifted to rail, but it also has its own limitations," he points out.
Due to losing the European market, Russia has had to redirect its oil exports to primarily eastern markets utilizing existing infrastructure.
Seven major oil ports are used to send its oil globally. Besides the Baltic above ones (Ust-Luga and Primorsk), the European part of Russia also encompasses a non-freezing port on the Barents Sea - Murmansk. However, as indicated by the ECFR expert, similar to Kaliningrad, Archangelsk, or Varandey, it does not have the infrastructure to facilitate export on a larger scale.
The large Black Sea port of Novorossiysk can handle 48 million tons of oil per year. Nonetheless, sending oil from the north to this area may prove unprofitable and riskier due to the use of underwater drones by Ukraine in attacks on the Russian fleet.
Additionally, the economic and logistical uncertainty would be further strained by transporting oil from the West Siberian deposits across the breadth of Russia to the distant port of Kozmino (with a maximum capacity of 60.8 million tons of oil per year) or the smaller ports of De-Kastri and Prigorodnoye.
"Baltic Strait of Hormuz"
Attacks on Russia's Baltic ports indicate a shift in the regional balance of power. Finland joining NATO and Sweden's efforts signal that the alliance of western countries is gaining control over this basin.
An extra piece of this puzzle is primarily the straits under Danish control. The European Union plans to use them to enforce sanctions and price restrictions on Kremlin-sold crude oil.
About 60% of Russia's total maritime crude oil exports pass through the Baltic Sea, as noted by the "Financial Times".
This is a much safer and profitable route than the alternative Arctic route via the Arctic Ocean. However, Russian tankers must then pass through one of four Baltic straits: Oresund, Great Belt, Fehmarn Belt, Little Belt.
Danish straits are expected to serve Russia in much the same way the Strait of Hormuz, through which 20% of world oil passes, serves global oil trading. The European Commission plans to assign Denmark the role of monitoring Russian exports and enforcing the sanctions regime.
It's unlikely the Union would consent to radical sanctions like an embargo on Russian gas or oil. There are still countries eager to purchase Russian fuels. Despite this, the community is searching for new means to increase pressure on Russia.
A potential solution could be a sharper price limit or price cap. Currently, it applies to oil from Russia sold by sea to third countries and is set at $60 per barrel. If the cap were to be lowered further and its application sealed with partners, pressure on Russia could intensify - concludes Dr. Kardaś.
