Drone attack in Ukraine tests Putin’s resolve, intensifying concerns

A series of political victories and a successful sweeping blow by Ukraine has reignited hopes that the war could tip in Kiev’s favor, but analysts warn that efforts to raise the cost of the conflict for Russia risk triggering further escalation.

More than four years after Russia’s all-out invasion, Ukraine launched an unprecedented drone attack on Gazprom’s Moscow refinery, triggering a massive explosion that sent black smoke billowing into the skies above the Russian capital.

The attack, which blew the lid off a storage tank, demonstrated the strengthening of Kiev’s medium- and long-range drone capabilities and extended a series of attacks against Russia’s energy infrastructure.

Ukraine has also benefited from a political tailwind in recent weeks as it ramps up attacks on Crimea, which Russia took over in 2014 as part of its strategy to isolate the peninsula.

US President Donald Trump has hinted at the possibility of renewed US support for Kiev, the selection of Hungarian Prime Minister Piotr Magyar has removed a major obstacle to Ukraine’s integration into the European Union, and Ukrainian President Volodymyr Zelensky has been praised for turning the diplomatic tables on Russian President Vladimir Putin with an open letter proposing face-to-face talks.

An interim peace deal between the US and Iran also appears to have pushed the Russia-Ukraine war up the geopolitical agenda, while falling oil prices are seen as likely to play a role in the Kremlin’s latest windfall.

But analysts told CNBC that Ukraine’s weakened air defense capabilities are a major obstacle to success on the battlefield, and the possibility of Russia escalating the situation further remains dangerous.

Grégoire Rouss, director of Chatham House’s Europe, Russia and Eurasia program, called the Ukrainian drone attack on the Moscow refinery “the most interesting development of the past year.”

Ruus said the incident highlighted Ukraine’s growing military confidence and emphasized Kiev’s understanding that it must continue to hit Russia “where it hurts the most” by cutting Russia’s energy revenues.

“It’s a bad time for Russia. The number of bankruptcies (of small and medium-sized enterprises) is increasing,” Rus told CNBC in a telephone interview.

Officially, Russia’s inflation rate stood at 5.6% year-on-year as of mid-June, lower than a month earlier, according to the Bank of Russia. However, Swedish intelligence recently claimed that the country was manipulating economic data and that the real inflation rate could be even higher, possibly reaching 15%. Ruth said such numbers are “significant.”

“Even when oil prices skyrocketed and went through the roof at the peak of the Middle East wars, Russia didn’t increase production. So they certainly got a windfall, but production didn’t increase. So the impact was pretty limited,” Ruth said.

Ruth said it was difficult to see how Putin could withdraw from the war without losing face and potentially losing power. “It’s like hiking at high altitude. Once you’re down the road, there’s no going back. That’s why it’s dangerous for Europe, because there’s always a risk of escalation,” he added.

Russia’s Deputy Foreign Minister Sergei Ryabkov said on Tuesday that Russia was aware of “signs of change” in the Trump administration’s position on the agreement reached at the Alaska summit last August, Russian state news agency TASS reported.

Ryabkov said talks with the United States would continue, but his comments appear to reflect growing dissatisfaction in Moscow.

Natya Seskulia, a senior Russian and Eurasian security researcher at the London-based defense think tank RUSI, said Ukraine’s medium- and long-range drone operations against Russia are “very important.”

“Ukraine is basically showing Russians that the cost of this war is only going to increase, not just for the Putin regime but for ordinary Russians,” Seskulia told CNBC in a video call.

“For a very long time, President Putin has been signaling to his people that Crimea is safe and that war will not come closer to their homeland. And now we see that they are facing the worst fuel crisis in a long time.”

Seskulia said it was too early to draw conclusions about the extent to which Ukraine could completely cut off Crimea, but Russia’s summer offensive was likely to become “much more complex” if attacks on the peninsula continued.

Russian authorities, which had already imposed fuel restrictions in Crimea, recently cut off civilian fuel supplies in the occupied territory amid continued Ukrainian attacks.

“We’re nearing the endgame and the risk of escalation is increasing,” TS Lombard managing director Christopher Glanville told CNBC by phone.

“Russia’s territorial disputes are currently limited to the remaining northwest corner of Donetsk Oblast, the last part of the Donbas Islands,” Granville said.

He added that Russia could “take six months to capture one or at most two such places” and that two places in Donbas, the cities of Kostiantynivka and Ryman, were “on the verge of falling.”

Granville said the region’s two main cities, Kramatorsk and Sloviask, remained in Russian hands.

“So we think it could take 12 months to get to that point, so in other words, we have an end point in sight.”

But Granville clarified that the same 12-month timetable would apply to the alternative prospect of continued Ukrainian pressure on Russia’s logistics and society, “resulting in Russia agreeing to a cease-fire on a front that does not achieve its current territorial objectives.”