Russia’s post-War Fossil Fuel Future

Russia dragged Ukraine into a brutal aggres­sive war – and the ‘West’ responded swiftly. The conse­quences for Russia and the world are not yet entirely fore­see­able. But it is almost certain that the war slowly depletes Russia’s economy, which has already been stag­nating in the past. The economic and financial sanctions are isolating Russia from important parts of the global economy. As a result, the Federal State Statistic Service (Rosstat) estimates that Russia, in 2022, will lose about 12 per cent of its gross domestic product (GDP), while the current inflation rate stands at almost 20 per cent with core consumer price skyrockets.

Most current analyses draw attention towards impli­ca­tions of the sanctions on Russia and their effects on the course of the war in Ukraine. However, it is necessary to recall that Russia is one of the leading global carbon emitters and remains a fossil fuel empire, known for its rigorous, non-reformist political and economic culture. The war is an infinite human tragedy. At the same time, the military actions are not only causing envi­ron­mental damage on the Ukrainian ground, affecting soil, water, and completely destroying ecosys­tems. They also have negative long-term conse­quences for a green tran­si­tion of the Russian economy.

Russia’s fossil fuel dependence

In the past three years, the Kremlin tenta­tively opened up to the issue of climate protec­tion. The Russian govern­ment ratified the Paris-Climate-Agreement in 2019 and Russia seeks to become carbon-neutral by 2060. Put under pressure by the export-oriented business community, civil society, inter­na­tional climate agree­ments, and projects such as the European Green Deal, President Vladimir Putin supported programmes to increase effi­ciency and reduce emissions. But these initia­tives are now wastepaper. Apart from an urgently needed reduction of Russia’s contri­bu­tion to climate change, these measures would also have been important to make the Russian economy less dependent on the dominant ‘fossil complex’. Diver­si­fi­ca­tion and moderni­sa­tion would have been necessary to transform the economy, which is struc­turally stuck in the 20th century. 

The fossil fuel-based post-Soviet state capi­talism has so far blocked the overdue moderni­sa­tion and diver­si­fi­ca­tion of the economy.

As one of the world’s largest exporters of oil, gas, and coal, Russia’s business model is based on the extrac­tion and the exports of fossil fuels. Although Russia – until now – contributes only 3 per cent of global GDP and accounts for 2 per cent of the world’s popu­la­tion, the country produces 10 per cent and consumes 5 per cent of the world’s fossil energy resources. The fossil fuel-based post-Soviet state capi­talism has so far blocked an overdue moderni­sa­tion and diver­si­fi­ca­tion of its economy. In contrast to the energy tran­si­tion speeding up in the EU, Russian state-owned companies have only recently started to act. Players like the Bank of Russia, Sberbank, Rosneft, and the state devel­op­ment corpo­ra­tion Vneshe­conom­bank started to invest in the low carbon pilot region Sakhalin Island. The nuclear energy giant Rosatom entered the wind energy market in 2018. Unfor­tu­nately, these opti­mistic and promising devel­op­ments in Russia’s climate agenda vanished since the beginning of the war.

According to the Inter­na­tional Energy Agency, in 2019, Russian elec­tricity gener­a­tion was composed of 46 per cent natural gas, 19 per cent nuclear, 16 per cent coal, 18 per cent hydropower, and only about one per cent wind and solar power. In the building and heat sector, it was 65 per cent natural gas, 21 per cent coal, and 14 per cent other sources. With the war and a fore­see­able economic decline, it is unlikely that the compo­si­tion of elec­tricity and energy produc­tion will change within the next decades. This is accom­pa­nied by the enormous damage to ecosys­tems and human health.

Russia’s ‘reverse indus­tri­al­i­sa­tion’

The various sanctions by Western powers already have a strong impact on the overall economic growth of Russia, espe­cially due to the lack of fresh invest­ments and tech­no­log­ical imports. Most sensitive to the current lack of foreign tech­nology and invest­ments are sectors requiring regular moderni­sa­tion of their operative systems such as energy, auto­mo­tive, and IT. Two out of three Russian wind power market players – Finnish Fortum and Italian Enel – have stopped their new invest­ment projects since the outbreak of the war, with Enel intending to leave the country within a few months. Danish Vestas, which has been producing wind blades in Russia for Fortum projects, also intends to withdraw. 

Accessible oil reser­voirs, such as in the area around Khanty-Mansiysk, are also almost exhausted. Without special drilling tech­nolo­gies provided by the foreign oil companies, recently drilled oil wells could become of no use. Russia’s last hope is China, which in the last four years increased its tech­no­log­ical support such as the Chinese Nanhai drilling rigs that were active in the Arctic waters of Murmansk. However, due to the war, these oper­a­tions were also stopped. In contrast to the energy market, the Russian market for tech­nolo­gies is too small for China to get partic­u­larly involved there. 

Russian leading state econ­o­mists are calling for ‘обратная индустриализация’, a ‘reverse indus­tri­al­i­sa­tion’ referring to an increased focus on the devel­op­ment of less advanced tech­nolo­gies, a circular economy, and import substi­tu­tion.

All in all, it is a grim scenario for the future of the Russian economy as a whole, and in partic­ular when it comes to the green tran­si­tion, technical inno­va­tions, measures for climate change adap­ta­tion, and carbon-capture tech­nolo­gies. The required moderni­sa­tion of the energy infra­struc­ture, as well as the import and instal­la­tions of elec­trol­y­sers for hydrogen produc­tion, the devel­op­ment of e‑mobility, or the instal­la­tion of heat pumps, are put on hold. But it is not only capital that is lacking. Apart from a lack of skilled workers, very soon, there will be shortages in high-tech devices, inno­v­a­tive appli­ca­tions, and scien­tific know-how, as well as in basic products, from auto­mo­bile parts to household appli­ances. Already now, there are reports of shortages of relevant compo­nents for aerospace and auto­mo­bile industry, paper, and dental supplies.

As a coun­ter­mea­sure to combat the current crisis, the Russian populist lead­er­ship calls for ‘обратная индустриализация’, a ‘reverse indus­tri­al­i­sa­tion’ referring to an increased focus on devel­op­ment of less advanced tech­nolo­gies, a circular economy, and import substi­tu­tion. The Soviet-time car manu­fac­turer Avtovaz (Lada), for example, is expected to have a comeback with its rather low-tech cars. Further­more, Russia is dependent on imports of seeds, pesti­cides, veteri­nary medicine, and incubated eggs. 

Since the sanctions in the aftermath of the Crimea invasion in 2014, steps have been taken to reduce these depen­den­cies, such as the creation of national seed banks and the promotion of domestic pesticide produc­tion. In order to develop these sectors, invest­ment in education and inno­va­tion is required, which will be very difficult without shared knowledge and expe­ri­ence with the inter­na­tional community. The global isolation will lead to more modern tech­nolo­gies becoming inac­ces­sible and being replaced by less efficient ones, leading to produc­tion inef­fi­ciency, decline in the product quality, and increased prices.

A green future is unlikely

Russia will not achieve its required green tran­si­tion through targeted reforms, by design so to speak, for the next years and probably decades to come. Envi­ron­mental and climate policies will hardly have a place in the domestic politics of post-war Russia. Previous successes in reducing air and water pollution will be undone. However, the economic decline and the reduced exports of oil and gas due to the lack of tech­no­log­ical know-how and falling demand will reduce Russia’s GHGs footprint in the long run, leading to the reduction of the climate impact by disaster.

As long as Putin is not toppled, it is unlikely that the few domestic political forces that have supported moderni­sa­tion and diver­si­fi­ca­tion will play a role after the war.

As long as Putin is in power, it is unlikely that the few domestic political forces that have supported societal moderni­sa­tion and economic diver­si­fi­ca­tion so far will play a role after the war. Likewise, civil society will not have the strength to advocate such reforms, as it is already under strong pressure. The somewhat polit­i­cally influ­en­tial middle class will be busy coping with the everyday life. Envi­ron­mental protests will be very difficult to voice due to the harsh political oppression.

The case of Russia shows that an ecolog­ical tran­si­tion can hardly be achieved without economic growth, political trans­for­ma­tion, and inter­na­tional coop­er­a­tion. In the deep recession that is now occurring, politics and the economy lack their ability to bring about change.

At some point, to some degree coop­er­a­tion between Russia and Western countries will become necessary. Unfor­tu­nately, it is likely that Putin will try to negotiate sanctions ease in return for GHG reduc­tions at the next inter­na­tional climate confer­ence. Thus, Russia will hold its high CO2 and methane emissions hostage. This is not a good basis for multi­lat­eral climate nego­ti­a­tions. One of the few avenues for possible coop­er­a­tion after the end of the war could be Putins percep­tion of climate change as a security risk. This percep­tion could be the basis for coop­er­a­tion in combating global warming. However, it will take a long time for Russia to give climate policy an appro­priate status both domes­ti­cally and in its foreign policy.

Dr. Lukas Daubner is Head of Program Green Modernity and Aysel Aliyeva Program-manager at Berlin-based political think tank Center for Liberal Modernity.