Russia’s ‘Green’ Risks

The topic of climate change has two aspects. The first one is that everyone generally acknowledges climate risks in the long term, but there are always more pressing issues to be addressed in the short term. The second aspect is that the adverse effects of climate change vary across economies. Those that are already experiencing these changes are the countries that are the least capable of boosting global efforts to prevent global warming as these are small poor economies. ‘Working at the IMF, I am constantly hearing about small island states near the equator suffering from droughts, floods, and hurricanes. These problems have a severe impact on people’s lives and welfare,’ said IMF’s Executive Director for Russia Ksenia Yudaeva who moderated the session on climate transition risks at the Bank of Russia’s Financial Congress.

The first aspect was also confirmed by a poll (slide in Russian) among the participants at the beginning of the session: they consider that the main problems in the next two years will be a slowdown of economic growth (34%) and high inflation (28,4%). As for the next ten years, the major problem will be a decline in the demand for hydrocarbons (32,2%), the basic commodity in Russia’s exports, which will be associated with the development of alternative energies. Another significant risk in the long term will be climate policy tightening worldwide (18,4%). ‘China seems to have reached the maximum level of consumption of fossil fuels. In contrast to other countries where this peak is not that close and might be reached in the 2030s, this has apparently already occurred in China, and Russia should definitely take this factor into account,’ Ksenia Yudaeva stressed.

Current developments in the area of green technologies and their potential effects on the Russian economy in the near future were discussed by the speakers of the session. Econs publishes a summary of the discussion.

Igor Makarov, Head of the Laboratory for Economics of Climate Change, Head of the Faculty of World Economy and International Affairs, Higher School of Economics:

• Russia was regarding the climate agenda as a western one for a very long time. This was partially justified because western countries were the first to actively counteract climate change. However, these efforts have been shifting towards non-western states in the last five years.
• The driving force for energy transition today is China demonstrating unprecedentedly high growth rates of renewable energies and related technologies, including electric cars. Furthermore, and more importantly, China has been pursuing an unprecedentedly comprehensive policy in this area. It is not just about setting carbon prices in the form of an emissions trading system, but also about implementing administrative plans to reduce emissions at the level of all provinces and all key industries and a very active industrial policy: renewable energies and electric cars are actually part of China’s industrial policy and the country has been investing huge amounts of money in this area. The gigantic scale enables China to reduce costs, which is why the country dominates these markets worldwide. Concurrently, China is controlling (link in Russian) the entire value-added chain by supervising production and, to a greater extent, the processing of critical metals and minerals (link in Russian). Moreover, China is actively promoting these technologies worldwide.
• Green energy investment made by countries of the Global South account for 87% of all energy investment, which is much more than the world’s average of about 60%. By the moment, already 17% of the Global South states have surpassed western states in terms of the ratio of renewable energy sources (RES) in electricity generation. In addition, 21% of the Global South countries have outstripped the West in terms of electrification, which is as critical as the replacement of fossil fuels because it enables the integration into energy transition of those sectors that were beyond the perimeter, such as transport. This is a huge market where many countries of the Global South are already ahead of the West. They need energy, the demand for energy is growing, they do not have fossil fuels, and therefore, green technology development is a perfectly sensible strategy. Simultaneously, western countries are restricting exports of Chinese green technologies to their markets. Hence, where are these technologies supplied? They are supplied to the Global South where they are implemented at relatively low costs. This is certainly affecting the demand for fossil fuels, which is critical for Russia.
• Many believe that the US climate policy has died under Trump. This opinion is oversimplification. The US president does not have a significant influence on the development of the US energy sector. During Trump’s first term, although he was defending the coal industry, coal-fired power plants were dropping out at the highest pace on US records. Conversely, under Biden, who by contrast was promising to protect climate, oil and gas output was increasing at a record-high rate. Many decisions in the USA are taken at the level of the states and they differ considerably. Approximately 20 states have already announced their commitment to the Paris Agreement and will continue green technology development independently of the US administration. To the contrary, about 20 more states established an anti-ESG alliance a few years ago, which was also a totally autonomous decision. The ratio of RES in the USA will continue rising gradually, and this is an established path which hardly depends on who is the president.
• Europe is reducing the focus on climate change issues. Although it was the first to start moving towards RES development, Europe is currently losing competitiveness in this area, first of all to China.

Alexey Miroshnichenko, First Deputy Chairman, VEB.RF:

• Europe is losing competitiveness in RES because it initially considered these issues as ideology rather than a race towards lower operating expenditures and was therefore seeking aesthetically appealing solutions without counting the costs. Unfortunately, such projects always fail. Greta Thunberg’s ideological rhetoric has faded, and the only thing that matters now is money. Europe has increased the use of coal. It is not that it has stopped using natural gas – it has just started to buy gas from the USA. Why? Because this is cheaper. As for China, it not only made efforts to reduce costs, but also implemented investment projects that are now yielding returns as China is selling its technologies to the Global South.
• If we count the money, that is, the cost of one kilowatt, I know only one Russian project of alternative – solar – energy that is more cost-effective than fossil fuels, but this is without taking into account the cost of infrastructure. The closer to the South, the cheaper RES. The further away from fossil energy resources, the more expensive fossil fuel-fired energy generation. The economic benefits of RES are obvious for the Global South, whereas gas infrastructure development is what seems to be more cost-effective for Russia so far.
• Our problem is not climate risks but rather a decline in exports of energy commodities, which are the basis of the country’s exports. I believe that the result of the poll at the beginning of the session speaks for itself, because in my opinion, the wording about the risk of slower economic growth very accurately describes the actual risk that Russia might face during the next few years. The solution is related not to climate but rather to non-oil and gas exports. If we leave aside climate ideology and count the money, the Russian economy will be able to earn more money through an increase in its growth rates and the share of non-oil and gas exports.

Yan Cherepanov, Head of Analytical Department, Russia Renewable Energy Development Association:

• If we look at a megawatt of new capacity being introduced in the world, with 90% probability it will be a RES megawatt, and this is becoming increasingly likely every year. In 2023, 484 gigawatts were deployed, which is nearly 5% of the total installed capacity of power plants worldwide, while by the end of 2024, this figure increased to 585 gigawatts. The growth rate of capacity is unprecedentedly high, and the trend towards the development of renewable energies has been accelerating further. Solar energy, which is the leading technology, accounts for nearly 77%.
• As to the composition of the cost of electric power generation, RES have the highest component ensuring the return of capital. Accordingly, the banking sector is a beneficiary of a higher ratio of RES around the globe and in the energy balance since the component ensuring the return of capital is the bread and butter of the banking sector. Banks are stakeholders of energy transition. This should be critical for Russia as long as its regulation in the electric power industry has a number of advantages compared to that of other countries.
• On the one hand, the scale of RES in Russia is as little as 6.6 gigawatts, which is nothing compared to China's annual capacity additions alone; the China’s capacity of RES has already exceeded that of heating energy, having by now reached nearly 45% of the world’s total capacity. However, on the other hand, this is more than one trillion roubles already invested in the construction of generation infrastructure, new generation facilities, and technology development. There is a basis already enabling Russia to gain economies of scale.
• If we look at what ensures the return of capital from banks’ perspective, RES are built under so-called capacity supply agreements implying that an investor in RES lends, in a sense, to the entire energy market by supplying a generation facility. Afterwards, the entire market, the entire economy is repaying this loan at an interest rate linked to the zero coupon rate on 10-year government bonds. This may be considered a sort of very reliable bond involving only technical risk of delayed commissioning or an incident at a facility. In this regard, both future and existing renewable energy assets in Russia may be the basis for the creation of new financial instruments to raise both investment and debt financing for RES development projects.

Maxim Morozov, Deputy Director of Financial Stability Department, Bank of Russia:

• The Bank of Russia’s position can be set forth quite concisely: climate risks are systemic risks for the Russian economy and financial sector. As is clear from the poll, and we also share this view, climate risks are significant and can materialise in the medium and long term. The key here is not to miss the moment when the medium term will become the short term.
• Russia is one of the world’s largest greenhouse gas emitters. Furthermore, hydrocarbons and highly carbon-intensive products account for two-thirds of Russia’s exports. Accordingly, climate transition risks are critical for Russia. Nevertheless, the ratio of transition risks and their drivers has changed notably in recent years. When we were preparing our consultation paper (in Russian) in 2020, the main source of transition risks was policies of the largest advanced economies, primarily the EU and the USA. These states were actively promoting energy transition through regulations and economic incentives, e.g. the US Inflation Reduction Act. A topic that was actively discussed then was the EU’s Carbon Border Adjustment Mechanism and, in particular, its impact on Russian exporters. Investors and major companies’ clients were also setting higher requirements for products, companies’ disclosures, and the carbon footprint. During that period, climate issues involved a strong moral imperative, although few can now remember Greta Thunberg’s campaigns. Therefore, as stated before, the climate topic was perceived as an agenda imposed by the West. By the way, there was a quite obvious economic rationale for that: alternative energies and a reduction in emissions were not cost-effective. However, the situation has considerably changed.
• First, technologies have become cheaper and more economically viable. Over the past 10 years, the cost of electric power generated by large solar and wind power plants has dropped by 60–90%. Alternative energy sources can thus compete with conventional power plants. According to the International Energy Agency, investment in green energies over 2024 was almost two times higher than investment in fossil fuel projects. The second important trend, which has already been spoken of, is that China is becoming the global leader of energy transition and advanced technologies. Today, China accounts for approximately 60% of all newly commissioned renewable energy-based facilities. Last year, electric cars accounted for over 50% in total car sales in China. This is considerably reducing the demand for traditional energy commodities. Thus, as estimated by the International Energy Agency, if these trends continue, electric cars may cause a nearly 5% decrease in the daily demand for oil as early as the end of the 2020s. This will entail a decline in exports of fossil energy commodities, and this risk is already materialising to a certain extent.
• The demand for oil might peak earlier than previously forecast, and in addition, China’s regulatory requirements will sooner or later affect Russian exporters. China might enact its carbon border adjustment mechanism quite shortly.
• For the Russian financial system, the climate agenda is not just an external agenda. In 2023, we conducted top-down stress tests when we made the assessments ourselves, and last year, we confirmed the results together with financial institutions. If the largest borrowers take no proactive measures, a third of companies might face financial problems as early as the mid-2030s. Moreover, considering that the pace of the agenda has been accelerating, these problems might occur even earlier.
• On the other hand, transformations in the world economy not only involve risks but also create new opportunities for the Russian economy. I am talking about the demand for critical minerals and the advancement of the nuclear power industry. In our opinion, climate transition risks should no longer be perceived as a purely external agenda or an external threat but should rather become an impulse to modernise and strengthen the economy.

Igor Makarov:

• Generally, Russia’s transition risks may be divided into three groups. These are risks to hydrocarbon exports, risks to carbon-intensive exports, and technological risks.
• Last year, we built scenarios of changes in the demand for hydrocarbons worldwide and Russian exports. We analysed three scenarios. The first one was ‘business as usual’ when only the existing policy measures would be implemented, without any new ones. The second scenario assumed that all countries would deliver on their commitments under the Paris Agreement by 2030. Finally, the ‘two degrees warming’ scenario implied that the countries would achieve the goal of the Paris Agreement. For each of these scenarios, we considered two options, which we notionally named ‘reconciliation’ and ‘confrontation’. ‘Reconciliation’ implied that Russian hydrocarbons would be again exported to Europe and other unfriendly states beginning from 2030, whereas ‘confrontation’ meant that unfriendly countries would totally refuse to purchase Russian hydrocarbons. Of the six scenario options, only the ‘business as usual’ scenario with the option of ‘reconciliation’ ensured a return of Russian hydrocarbon exports to the average level of 2019–2021. You can estimate how likely this scenario is at the moment. Furthermore, the return to the 2019–2021 average is apparently not the level that may be perceived as an astounding success. None of the scenarios showed that Russian exports, or generally, hydrocarbons might ever again become a driver of the Russian economy.
• The second type of risks, that is, risks to Russian carbon-intensive exports, is associated with China. It has already set carbon intensity reduction targets in all key sectors, including for metals and chemicals and is now creating a system of benchmarks at the product level. The regulation at the product level is a novelty in the climate regulation. It is highly likely that similar benchmarks will also be applicable to imports by 2030. In other words, if a product’s carbon intensity fails to meet a certain benchmark established by China, it will not allow supplies of this product to its market.
• Finally, there are technological risks. The development of renewable energy is creating a giant technology market, which is actually larger than the renewable energy sector itself. The technology market for electric cars, heat pumps, and storage devices is already three times larger than the market of merely renewable energy equipment. Moreover, it will become eight times larger by 2035. The risk is that Russia is scarcely present in this huge market. The same risks arise in traditional industries where modern technologies are based on electrification. These risks are associated with how Russia will look like in the world in 10–15 years. I believe that, given the import substitution measures that are now very extensively implemented in Russia, there is a certain potential for the development of green technologies. We need to develop new technologies rather than substitute already available foreign technologies with domestic alternatives.