Russia’s Economic Future: Part 6
International Issues
- Climate Change
Irrespective of whether or not climate change is really a huge man-made problem that can be countered by government and social policies, it is clear that it much of the world sees it as a threat – and this will affect Russian exports.
The February 2022 Russian invasion of Ukraine took place four months after the October-November UN Climate Change Conference (COP26) in Glascow. A very large and influential group of Russian officials and corporate executives attended this conference, and it seemed that after years of trying to ignore the climate change debate and possible consequences Russia was going to take the issue very seriously.
The COP27 conference took place in Shar-El Sheikh, Egypt with the war and its consequences of well under way. But Russia still attended and advocated the same main approaches that the world should take and reiterated its own intentions. This should not have been a surprise because Russia was never going to follow a path that complied with the wishes of the West and its supporters, but instead would pursue its own interests and try to persuade other countries to fall in line with it. This is not a criticism of Russia because most other countries are taking the same approach.
Besides defending the advantages of natural gas, Russia argues nuclear power should be accepted as “green” and that the carbon absorption of forests should be part of the calculation of a country’s contribution to fighting climate change. These approaches are very unlikely to change irrespective of who or what group is governing Russia.
As already discussed in this text, Russia has built very significant expertise and has a good international reputation for utilizing atomic energy both domestically and as an exporter of its technology and builder of power stations. Russia’s technological capabilities and the international market opportunities mean that Russia will stick with it position on nuclear power irrespective of what other countries may decide or agree to.
The war in Ukraine has most likely made it more difficult for Russia to put the case that the carbon absorption capacity of forests should be taken into account when calculating a countries contribution to fighting climate change. Whatever countries individually or in groups decide, the calculation of the carbon absorption capacity of forests will depend on a myriad of data and judgements about the ability of different types of forest to absorb CO2. Generally, tropical rainforests are considered most effective in this, and Russia has none of these. Sensible consideration of all these forest associated factors depends of a high degree of trust, but Russia’s actions in Ukraine have destroyed much goodwill and built up a reservoir of distrust. Moreover, “other countries with vast northern forests, such as Canada, Sweden and Finland have not joined Russia in raising this issue”.[1]
The practical use of hydrogen as an energy source is controversial,[2] but Russia thinks it has advantages in the international market because of its natural resource base and experience in dealing with gas issues on a large scale. At this time, no concrete proposals have been put into play, but Andrei Belousov, Russia’s First Deputy Prime Minister, said in late 2021 (just prior to COP26) that Russia “can occupy more than 20% of the global hydrogen market on the 20-year horizon”.[3]
Within Russia, the war in Ukraine and its consequences have resulted in some rolling back of environmental regulations. For example, vehicle emission standards have been eased because foreign sanctions mean that some specific foreign technology used in domestic vehicle production is no longer available.[4]
Russia’s “pivot to the east” – so lauded by many – means that much less attention will be paid by both officials and business to the views of Europe. The European Union’s proposed Carbon Border Adjustment Mechanism (CBAM) to impose taxes or tariffs on imports of various goods produced in carbon intensive industries clearly got Russian attention. Just prior to COP26 Prime Minister Mishustin warned Russian producers that they could face a domestic carbon tax, as it would clearly be better if such payments went to the Russian finance ministry rather than EU revenue authorities.[5] The situation in Ukraine, irrespective of the outcome, is unlikely to change this view even though trade with Europe has been significantly reduced.
On the other hand, the views and action of China will assume greater importance. China, like Russia, has pledged to become “carbon neutral” by 2060 and it is unclear whether China might eventually follow the EU example.
Russia wants good relations with so called “Global South”, and by “employing rhetoric about neo-colonialism and the construction of a multipolar world”, is attempting to bring non-Western countries over to its side.[6] Russian officials also keep saying, at COP27 and in general, that Russia and other non-Western countries should develop their own “sovereign” green agendas and not just follow Western understandings of what is ‘green’ and good for the climate.[7] Similarly, Russia continues to insist on the principle of “technological neutrality”: that each country can decide for itself how it will reduce emissions.[8]
Russian government positions and policies will also be influenced by views on what the effect of climate change might be on the Russian economy and society. At one level, Russia – like many countries – might decide that climate change is a world-wide phenomenon and that it can do little to change the situation. However, Russia has a bigger influence than most countries because of its size and its importance as a producer of hydrocarbon energy.
While Russians can be quite ecologically minded on some issues such as garbage dumps and pollution in Lake Baikal, two factors are likely to limit the public pressure to take broader action for the greater good of mankind. One is the general lack of economic growth that is likely to be a at least medium-term consequence of the conflict in Ukraine and the poor relations with the more economically and technologically advanced West. The second reason, in my view, is that public interest groups – such as those concerned about the climate – will find that they are not particularly welcomed either by the government or society because of a more nationalist stance in Russian society as a whole engendered by both the war in Ukraine and government propaganda.
It is possible, however, that adverse climate change – or even “weather” – driven events could provoke a more concerned response from society and the government. There are a number of reports that list and attempt to measure the effect of climate change.
Russia’s Audit Chamber[9] has reported in that various direct climate change effects could lower GDP by 3 percent annually in the next decade.
Any significant events or series of events that could be attributed to climate change could build on the thoughts that prompted such a large Russian representation at COP26 in 2021 in which has seemed to herald a new approach much more proactive official attention to climate change after years of inattention and even ridicule. Well known analyst Dmitry Trenin[10] noted that “Russia sent a large delegation — 312 people — to COP26: more than the host country itself, and twice as many as the United States. It included representatives of not only the presidential administration; the ministries of energy, forestry, and economic development; the London embassy; and the Moscow city government, but also of leading banks like Sberbank and VEB, and major corporations like Rosatom, Gazprom, Severstal (metallurgy), Inter RAO (electricity), and Sibur (coal). All of those people came not only to listen and learn, but also to engage and build contacts. Intensity of the Russian engagement reflects sea change that has occurred in the Kremlin’s attitude to climate change over the past year or so.”
In September 2021, Russian central bank Governor Elvira Nabiullina said that the regulator had moved from “neutrality” on climate issues to pressing financial institutions to take account of climate risks. There may have been an element of being fashionable in this change, but it is not likely to be reversed.[11]
There are also other views. Russia has a somewhat proprietary attitude to Arctic issues, and particularly the Northern Sea Route (NSR) which is expected to be become more convenient as climate change reduces the amount of ice. Many see this as an advantage for Russia.
There is also significant resistance to the idea that changes are needed. For example, Rosneft CEO Igor Sechin has warned that it would be big mistake to reduce investment in long-term fossil fuel projects because the next few years likely to see increased demand for traditional energy.[12]
“Legislation introduced in 2019 as part of Russia’s ratification of the Paris Agreement would have instituted emissions quotas and carbon pricing, but lobbying efforts by the influential Russian Union of Industrialists and Entrepreneurs significantly diluted the bill, resulting in weaker provisions on emissions reporting and the elimination of a national carbon trading system and penalties for polluters.”[13]
The war in Ukraine has also changed the ability of Russia to meet own climate goals, irrespective of their motivations. Import substitution policies and foreign sanctions have reduced access to some foreign technologies. And then there is the “technology sovereignty” policy which I discussed in depth earlier in this text.
Vedomosti, a Russian business newspaper, has reported that Russian “decarbonization largely depends on imported equipment and technologies, including from unfriendly countries”. According to Alexander Shirov, director of the INP RAS, “dependence on imported equipment and technologies necessary for decarbonization in the oil sector is 55%, in the coal industry – 45%, in the power industry – 31%”.
At this stage there is no sign that Russia’s plans to achieve “carbon neutrality” by 2060 will be publicly changed. As part of import substitution, a reorientation to domestic components of technologies necessary for decarbonization is being carried out, a representative of the Ministry of Industry and Trade said.[14]
Writing in January 2023, nearly one year after the invasion of Ukraine, Angelina Davydova, wrote that: “Russian authorities continue to pass legislation related to the climate and carbon regulation, and new projects are being launched. Companies are standing by their emissions reduction targets and ESG (environmental, social, and governance) measures”.[15]
When asked “what order of proportion of GDP will be required for such a transition?”, Belousov replied: “The order of the numbers is not fantastic. Just for example: we have our entire so-called intensive scenario in the energy transition strategy worth about 90 trillion rubles. For 28 years. That means 3.2 trillion a year. That is, we are talking about less than 3% of GDP.”[16]
“The Strategy for the Socio-Economic Development of Russia with a Low Level of Greenhouse Gas Emissions until 2050, assumes that Russia will invest an average of 1% of GDP from 2022-2030 in reducing net emissions. However, the various federal funding streams that were intended to implement approved climate policies failed to materialize.”[17]
As I have argued in other sections of this book, most aspects of Russia’s future will be determined by the actions of Russians and their government. Even more so than Russia’s real external security situation and relations with other countries, any real effects of global climate change will need to be adjusted to rather than influenced by Russia. The country will adjust but the other objectives of its authoritarian government and weak social institutions mean that the path is likely to be erratic.
- Arctic
A July 2023 RIAC report on the “The Future of the Arctic Council”,[18] says that “the Arctic Council Council is recognized as the most authoritative intergovernmental forum for inter-state cooperation in the Arctic. It determines (in terms of global climate change) areas for regulating environmental and socio-economic activities in the Arctic region, and consolidates support from the Arctic.[19]
“The Arctic Council was not created based on an agreement between states, and its status as an intergovernmental organization has never been officially recognized at the interstate level. Despite the fact that it is not an organization in the formal legal sense (i.e., it is not subject to international law de jure), this “high level forum” has over the years, unquestionably strengthened the Arctic’s legal stability, especially in terms of multilateral environmental and social economic cooperation between the countries of the region. It has almost gained universal recognition as a necessary international mechanism for managing the Arctic, and is a much-needed producer of multilateral legal norms that clarifies regional legal issues. This includes, first of all, international agreements negotiated first at the Arctic Council which have now entered into force: the 2011 Agreement on Cooperation on Aeronautical and Maritime Search and Rescue in the Arctic; the 2013 Agreement on Cooperation on Marine Oil Pollution Preparedness and Response in the Arctic;11 and the 2017 Agreement on Enhancing International Arctic Scientific Cooperation.”[20]
The RIAC report goes on to say thar “traditionally, the Arctic Council avoided dealing with matters related to military security”[21] but “Western member states broke the foreign policy tradition of maintaining Arctic ‘immunity’ from disagreements among Arctic states that arise in other regions by publishing a Joint Statement on March 3, 2022 on the events in Ukraine. The Statement reads:
“Canada, the Kingdom of Denmark, Finland, Iceland, Norway, Sweden, and the United States condemn Russia’s unprovoked invasion of Ukraine and note the grave impediments to international cooperation, including in the Arctic, that Russia’s actions have caused.
• The core principles of sovereignty and territorial integrity, based on international law, have long underpinned the work of the Arctic Council, a forum which Russia currently chairs.
• In light of Russia’s flagrant violation of these principles, our representatives will not travel to Russia for meetings of the Arctic Council.
• Our states are temporarily pausing participation in all meetings of the Council and its subsidiary bodies.”[22]
According to the RIAC report, “some have referred to the Joint Statement of the seven Western member states as a ‘majority decision’ of the Arctic Council, which is erroneous from an international legal point of view. The Arctic Council only makes decisions by consensus. Neither the founding document of the Arctic Council (the 1996 Ottawa Declaration) nor its Rules of Procedure allow for a different procedure in making decisions.”[23]
“The second Joint Statement of the seven Western Arctic Council states released on June 8, 2022 reiterates previous points on Russia’s “invasion of Ukraine,” the “flagrant violation of the principles of sovereignty and territorial integrity,” and the “pause” in the participation of the Western states in the Arctic Council.”[24]
The RIAC report raises the possibility that Russia could withdraw from the artic Council and looks at possible implications. It notes that “Russia has the longest continental coast in the Arctic Ocean; it has the largest population (among the Arctic states) living beyond the Arctic Circle; it has a unique military and civilian infrastructure in the Arctic, including an icebreaker fleet, etc.”[25]
The RIAC report raises the possibility that Russia could withdraw from the artic Council and looks at possible implications, which include increased US influence. Given such as view, I see no reason for Russia to withdraw from the council.
At other times there have been suggestions regarding Russia-China differences on Arctic issues. This seems odd to me given that China has no territory or territorial aspirations in this region and is thus not an “Arctic state”.
In contrast to several earlier RIAC annual reports on Russia-China relations, the 2021 and 2022 versions do not have a specific section devoted to Russia-China cooperation in the Arctic. However, the 2020 version[26] did say that some “Arctic states have also voiced certain concerns about China’s strategic intentions in the Arctic” and the 2022 RIAC report – somewhat cryptically – says that “it appears particularly important to foster a climate of mutual trust between Russia and China in Arctic affairs. When launching cooperation projects in the Russian Arctic, the advantages of all the parties need to be carefully assessed and their interests should be taken into account, with due consideration of the special status of Arctic states.”
The issue of Russia-China trust was more directly tackled in a February article in the Eurasian Daily Monitor[27] which states “Russia has promoted the Northern Sea Route with the expectation that China will be a major user. And it is assertively advocating for the development of natural resources, such as natural gas in the Arctic, with the hope that China will be a major customer. Both of these calculations, combined with the economic pressure from the Western sanctions regime, have pushed Moscow to cooperate ever more closely with Beijing in the Arctic and Russian High North. However, concerns are growing in Moscow that the ambitious Russian goals for the region may not work out in the ways it hopes. Some Russian observers worry that China will graduate from a junior partner in both spheres to a dominant player. One fear is that Beijing will ultimately transform Russia’s Northern Sea Route—an east-west maritime corridor that follows the Russian Arctic coast—into just a constituent segment of a Chinese-dominated Polar Silk Road. Another anxiety is that Beijing could exploit cooperation in the development of Russian Arctic gas fields as a basis for further expanding China’s political-economic interests at Russia’s expense. As a result, worried voices in the Russian capital are now suggesting that China is helping Russia today but may push it aside later.”
Whatever the real situation about such Russian concerns, The Diplomat magazine says that “whereas the 2015 version of the Naval Doctrine stated that the ‘development of friendly ties with China is a key component of national maritime policy in the Pacific direction’, China is completely absent from the new 2022 Naval Doctrine.[28]
On the whole, unless climate change significantly changes the physical Artic environment – and, of course, some people claim it will — the Arctic issue is of secondary importance to Russia’s economic future.
CONCLUSION
Within a few hours of the announcement of the February 2022 “special military operation”, the Kremlin had summoned about 40 Russian businessmen to a face-to-face meeting with Putin. “We will support our businesses in spite of sanctions, and you must be patriotic”, one source familiar with the substance of the meeting described the tone to The Bell[1].
In early 2022, after the invasion of Ukraine, Russian authoritarianism moved to serious dictatorship, and most people became quite fearful of what they said and wrote. I was living in Russia at the time (and remained there until October 2022) and found that Russians who I had known for years responded to my explicit talk of “war” by using the term “special military operation” when replying to me (even when we were having one-on-one conversations when no-one else was around). In some cases they seem to believe the Putin propaganda, but most cases it seemed to be a practiced defensive way of speaking to make sure that there was no possibility of them being reported to the security services following other conversations.
Thus, we are left with a Russia that has slid into dictatorship by one man. It may be of interest that I have written a book on dictatorship, entitled “Dictatorial CEOs & their Lieutenants – Inside the Executive Suites of Napoleon, Stalin, Ataturk, Mussolini, Hitler and Mao” — and Putin now fits in with them.[2] Like these other dictators, Putin is a very talented man who has remained in power by strength of character and personality and ideas; persuading those close to him that he is the best man for the job – although fear is increasingly used for this persuasion!
But, not surprisingly, after over 20 years in power Russia now has a leader who no longer listens to proposals from various government agencies and then chooses the one he thinks best. According to an October 2022 article in Meduza by Andrey Pertsev, Putin previously “would voice scenarios that he thought were likely and ask, ‘What if we do this? What will the consequences be? And what if we do it this way? Then what?’ But that’s stopped, said a source close to the government. According to the source, after the start of the pandemic, Putin (who’s known to worry obsessively about his health) stopped consulting the ministers altogether — and limited his decision-making process to brief discussions with his ‘inner circle’ (which, in recent years, is believed to consist primarily of the heads of Russia’s security agencies).”[3]
Russia authorities can point to an economic system that has weathered the situation since Februay 2022 quite well. But, as I have argued at various stages in this text, the longer-term outlook is much less favourable partly because of foreign sanctions which will most likely remain in place to a great degree for years – and certainly will remain in place while Putin is in power – and because of the mixed medium-longer term outlook for its export products and Russia’s relations with near countries.
But, very importantly, Russia has increasingly adopted domestic policies that will have an adverse medium and longer-term effect on its economy and on its political and social life. One is the almost religious zeal for “technological sovereignty”, and another is the effective nationalization of many foreign business assets which will hinder any significant future foreign investment – including from so-called “friendly” countries such as China – no matter how the fighting in Ukraine pans out. Perhaps the worst policy from a longer-term point of view is the intellectual corruption of the education system with wild propaganda stories that will tend to push many students away from the ability to think rationally about important economic and political issues.
At the present time, however, many of these adverse effects will only be clear further down the track. On 8 July, Kommersant reported[4] on some discussion at 2023 Russian Central Bank “Financial Congress”[5] which suggested that visible national statistical effects of the war in Ukraine, and foreign sanctions, on the structure of the Russian economy are scant – as opposed to those on foreign trade![6] However, at the sector level there was evidence that “the replacement of the supply of departed medium-sized foreign manufacturers by Russian companies in the domestic market, are proceeding quickly and actively”.[7]
The big question is what is the quality of this “replacement of supply”? I have argued in this text that the overall quality is not going to be high.
Natalya Zubarevich from Moscow State University, said that “a significant part of the regional processes in the economy and the labor market do not show signs of structural transformation – it is mainly about the resumption of the “pre-COVID” situation, the reason for which she sees in large-scale budget compensations to the population in 2020 –2022”.[8]
Kommersant also reported that “the only consensus so far is that on the horizon until 2040 there are no grounds to talk about the departure from the rent-based (resource-based) nature of the Russian economy, although the ‘non-resource’ component in it will inevitably grow (if only due to restrictions on commodity exports and the plans of the EU and other countries for energy transition and the introduction of carbon regulation, which, according to most experts at the Fincongress, are overestimated)”.[9]
Kommersant reported that “in many ways, a rather strange picture – active investments in import substitution at an average level (more precisely, in replacing artificially limited imports with a sharp decrease in competition in the domestic market) without visible traces of major structural shifts in the economy (which would manifest themselves, for example, in structural unemployment and massive investment in the retraining of personnel, increased labor mobility, etc.), apparently a consequence of rather large stocks (including imported intermediate goods) formed in 2020–2021, as well as a decline in consumption in 2021–2023 compared to normal.”[10]
The Kommersant article concluded that “in this case, the question of in what directions the attempts of a new positioning of the industries of the Russian Federation will be carried out both in the domestic and foreign markets should be asked in 2024-2025.[11]
[1]. See: https://thebell.io/vy-dolzhny-byt-patriotichny-chto-skazal-putin-na-vstreche-s-biznesom-v-den-vvoda-voysk-na-ukrainu?utm_source=The%20Bell%20(Eng)&utm_campaign=09b7942fc3-EMAIL_CAMPAIGN_2018_06_01_10_28_COPY_01&utm_medium=email&utm_term=0_cc8c2d1cde-09b7942fc3-73983373
[3] Andrey Pertsev, “‘People are scared shitless around him — but it’s fear without respect’ Putin is 70. Meduza’s sources say his ‘power vertical’ is ‘collapsing’.” Meduza, October 7, 2022
[4] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[5] https://ifcongress.ru/ru
[6] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[7] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[8] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[9] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[10] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[11] “Стакан наполовину выпит”, Kommersant, 8 July 2023
[1] Angelina Davydova, “What Is Russia’s Place in the Fight Against Climate Change?”, 26 January 2022
[2] Yuriy Melnikov, “Export of Hydrogen From Russia: A Balance Between Hype and Opportunities”, Valdi, October 2021. https://valdaiclub.com/a/highlights/export-of-hydrogen-from-russia/
[3] Andrei Belousov, «Другого ответа на изменение климата человечество пока не придумало», Kommersant, 18 October 2021 https://www.kommersant.ru/doc/5038967
[4] Angelina Davydova, “At COP27, Russia acted as though it had not invaded Ukraine’, OpenDemocracy, 22 November 2022
[5] Bloomberg, “How Putin’s advisers convinced him to take climate risks seriously”, 6 October 2021
[6] Angelina Davydova, “How Russia’s War Is Impacting the Global Environmental Agenda”, Carnegie, 11 January 2023. https://carnegieendowment.org/politika/88773
[7] Angelina Davydova, “How Russia’s War Is Impacting the Global Environmental Agenda”, Carnegie, 11 January 2023. https://carnegieendowment.org/politika/88773
[8] Angelina Davydova, “How Russia’s War Is Impacting the Global Environmental Agenda”, Carnegie, 11 January 2023. https://carnegieendowment.org/politika/88773
[9] Heather A. Conley and Cyrus Newlin, “Climate Change Will Reshape Russia”, CSIS, 13 January 2021
[10] Dmitri Trenin, “After COP26: Russia’s Path to the Global Green Future”, Carnegie, 16 November 2021
[11] Bloomberg, “How Putin’s advisers convinced him to take climate risks seriously”, 6 October 2021
[12] Dmitri Trenin, “After COP26: Russia’s Path to the Global Green Future”, Carnegie, 16 November 2021
[13] Heather A. Conley and Cyrus Newlin, “Climate Change Will Reshape Russia”, CSIS, 13 January 2021
[14] Анастасия Бойко, “Эксперты РАН оценили влияние санкций на планы России по декарбонизацииx”, Ведомости, 22 ноября 2022
[15] Angelina Davydova, “How Russia’s War Is Impacting the Global Environmental Agenda”, Carnegie, 11 January 2023. https://carnegieendowment.org/politika/88773
[16] Andrei Belousov, «Другого ответа на изменение климата человечество пока не придумало», Kommersant, 18 October 2021 https://www.kommersant.ru/doc/5038967
[17] Anna Korppoo, “Russian requests for climate cooperation: Reasons for scepticism”, Fridtjof Nansen Institute,
[18] “The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[19] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[20] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[21] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[22] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[23] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[24] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[25] The Future of the Arctic Council”, RIAC, Working Paper No. 75 / 2023, 6 July 2023
[26] https://russiancouncil.ru/en/activity/publications/russia-china-dialogue-the-2020-model/
[27] Paul Goble, “Moscow Needs Beijing in the Arctic but Worries About China’s Expanding Role”, Eurasia Daily Monitor, 1 February 2022
[28] Daniel Rakov, “Russia’s New Naval Doctrine: A ‘Pivot to Asia’?”, The Diplomat, 19 August 2022