Ukraine is raising the cost of war for Russia — and testing Putin's resolve

A string of political victories and deep-strike successes by Ukraine has revived hopes that the war could be shifting in Kyiv's favor, though analysts warn that efforts to raise the conflict's cost for Russia risk triggering further escalation.

After more than four years since Russia's full-scale invasion, Ukraine launched an unprecedented drone strike on Gazprom's Moscow Refinery, triggering a huge explosion and sending black plumes of smoke billowing into the sky over the Russian capital.

The attack, which blew the lid off a storage tank, showcased Kyiv's enhanced mid- to long-range drone capabilities and extended a series of strikes on Russia's energy infrastructure.

Ukraine has also stepped up its strikes on Crimea, which Russia seized by force in 2014, as part of a strategy to isolate the peninsula, and has benefitted from political tailwinds in recent weeks.

U.S. President Donald Trump signaled the potential for renewed American support of Kyiv, the election of Hungarian Prime Minister Peter Magyar removed a major obstacle to Ukraine's integration into the European Union and Ukrainian President Volodymyr Zelenskyy received praise for turning the diplomatic tables on Russian President Vladimir Putin with an open letter that proposed face-to-face talks.

The end game is at hand and, therefore, we now have the risk of escalation.Christopher GranvilleManaging director at TS Lombard

An interim U.S.-Iran peace deal also appears to have pushed the Russia-Ukraine war back up the geopolitical agenda, while tumbling oil prices are seen as likely to cut into Moscow's recent windfall.

Analysts, however, told CNBC that Ukraine's depleted air defense constitutes a major obstacle to its battlefield success and the potential for Russia to escalate the situation even further remains a danger.

Grégoire Roos, director of the Europe, Russia and Eurasia programs at Chatham House, described the Ukrainian drone attack on the Moscow oil refinery as "the most interesting development over the past year."

The incident underscored Ukraine's growing military confidence, Roos said, as well as highlighting Kyiv'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] has been on the rise," Roos told CNBC in a phone interview.

Officially, Russia's inflation rate came in at 5.6% year-over-year as of mid-June, lower than a month earlier, according to the Bank of Russia. But Swedish intelligence recently alleged the country was manipulating economic data and that the true inflation rate could be much higher, perhaps as high as 15%. Roos said such a figure was "quite something."

"Even when oil prices skyrocketed and went to the roof at the peak of the war in the Middle East, Russia had not increased its production. So, yes, it benefitted from a windfall, but production was not increased — so the effects were rather limited," Roos said.

Roos said it's difficult to see how Putin can back out of the war without losing face and, therefore, potentially losing power. "It's like hiking at high altitude. When you've taken the path, there is no way back. And that is what makes it dangerous for Europe because the risks of escalation are always there," he added.

Russian Deputy Foreign Minister Sergei Ryabkov said Tuesday that Moscow has observed "signs of a shift" in the Trump administration's position on understandings reached at a summit in Alaska last August, according to Russian state news agency Tass.

The comments appeared to reflect growing frustration in Moscow, although Ryabkov said talks with the U.S. would continue.

Why Crimea is under pressure

Natia Seskuria, senior fellow in Russian and Eurasian security at RUSI, a London-based defense think tank, said Ukraine's mid- to longer-range drone campaign against Russia was "really significant."

"Ukraine is basically demonstrating to the Russians that the cost of this war is only increasing. Not just for Putin's regime but for ordinary Russians," Seskuria told CNBC by video call.

"For a very long time, Putin has been signaling to his population that Crimea is safe, and the war would not come closer to their homes and now we see that they are facing the worst fuel crisis in a long, long time."

Seskuria said it is too early to make conclusions on the extent to which Ukraine can cut Crimea off completely, but continued attacks on the peninsula were likely to make Russia's summer offensive "much more complicated."

Russian authorities, which had already imposed fuel restrictions in Crimea, recently suspended fuel supplies to the public in the occupied region as Ukrainian attacks persist.

Analysts warn of escalation

"The end game is at hand and, therefore, we now have the risk of escalation," Christopher Granville, managing director at TS Lombard, told CNBC by telephone.

"Russia's territorial agenda is now limited to the remaining northwestern corner of the Donetsk oblast, which is the last part of the Donbas," Granville said.

He added it could take Russia "six months to capture one or at most two such places" and that two places in the Donbas, the cities of Kostyantynivka and Lyman, were "about to fall."

Two major cities in the region, Kramatorsk and Sloviansk, are still to fall to Russian forces, Granville said.

"So, you're looking at 12 months potentially to get to that point, and so in other words, you can see the end point."

Granville made clear, however, that the same 12-month timeline could be applied to the alternative prospect of continued Ukrainian pressure on Russian logistics and society, "resulting in Russia settling for an armistice on front lines that fall short of its present territorial goal."