Russia, Climate Change and the Global Energy Transformation

Over the next few decades, a reduction in the use of fossil fuels worldwide presents a bigger problem for Russia than climate change itself.

As Russia masses military forces on the borders of Ukraine, Western governments are consumed with trying to decipher President Vladimir Putin’s intentions and predict his next moves. While this heightened focus is fully justified, we should remain attentive to longer-term processes that might exacerbate the threat that Russia poses, both to its neighbours and to the West. One such process is climate change.

Climate change presents serious problems for Russia, from intensifying forest fires to the melting of the permafrost that covers roughly two-thirds of Russian territory. However, in the coming decades, Russia’s most serious problems will be caused not by climate change itself, but by the actions other governments are taking to mitigate it. Chief among these is the shift away from the burning of fossil fuels towards renewable sources of energy.

Events are likely to unfold in two parts. Initially, in the 2020s, a reduction in Western energy companies’ investment in hydrocarbons will probably combine with continued strong demand for these polluting energy sources to keep prices buoyant. Russia’s balance sheet will remain healthy and Europe’s dependence on Russian gas might even increase as European gas infrastructure is decommissioned. Russia will probably remain in a strong position.

In the 2030s, however, the picture will probably begin to change. Demand for oil – the crucial source of revenue for the Russian budget – may begin to decline irreversibly as the global energy transformation gathers momentum. By then, the cost of producing a barrel of Russian oil will have risen. Russia’s profit margin will be squeezed, ushering in an era of chronic budget deficits that can be alleviated, but not eliminated, by other sources of revenue. This new era threatens to be destabilising for both Russia and the West, making the current European security crisis still more acute.

Before examining this new era in greater detail, though, let us backtrack. Some might object that the picture painted here is too negative. Have Russia’s recent actions not shown that it is at last taking climate change seriously? And could Russia not diversify its economy, forestalling the problems described above?

Russia’s official position on climate change has definitely shifted markedly over the last 12–18 months. For most of the last two decades, Russia has been a ‘denialis[t] in all but name’. As late as 2019, Putin was questioning whether climate change was manmade and criticising wind turbines for killing birds and disturbing earthworms. Russia made no serious attempts to combat climate change.

Russia has no intention of abandoning its hydrocarbon-fuelled economic model. It has raised its bet on hydrocarbons over the past decade and continues to invest heavily in them

This inaction makes the shift in Russian rhetoric over the last 18 months all the more remarkable. Senior Russian officials have come closer to recognising the anthropogenic nature of climate change and the Russian government has prepared a series of laws and strategies, the most important of which is the Low Carbon Development Strategy to 2050. Its final draft envisages Russia’s net emissions roughly halving between 2019 and 2050 before reaching zero in 2060.

Progress should not be exaggerated, however. First, Russia did not jump, it was pushed. It was mainly the threat of EU regulation that forced Moscow to act, not a damascene conversion to the cause of environmentalism. Furthermore, Russia has a poor record of implementing such strategies, while the very nature of Russia’s proposed methods will make them unlikely to succeed. Russia is seeking to cut net emissions mainly by absorbing more carbon dioxide, not by producing less. This, in turn, relies on recalculating the existing absorptive capacity of Russia’s ecosystems, principally its forests, and increasing their future absorptive capacity through measures such as fire prevention. Many experts question whether this is achievable.

In fact, Russia has no intention of abandoning its hydrocarbon-fuelled economic model. It has raised its bet on hydrocarbons over the past decade and continues to invest heavily in them, from Rosneft’s massive Vostok oil project to the Elga coal project in the Russian Far East.

One reason for Russia’s stubbornness is simple: Moscow does not accept that the transition to renewable energy will happen as fast as Western governments assume and is seeking to cash in now while the going is good. More deeply, the Kremlin fears that change could be destabilising: whereas the current model of hydrocarbon exploitation and state ownership gives Russian elites the tools they need to pacify the population, exert influence abroad and enrich themselves, serious structural change could trigger processes that the Kremlin cannot control. As such, oil and gas are likely to remain central to how the Russian state operates for at least the next decade.

The Kremlin’s bet on hydrocarbons is a high-stakes gamble. If Russia is right and the energy transformation takes much longer than expected, that would be good for Russia’s hydrocarbon exports but bad in terms of the longer-term cost of mitigating climate change. If it is wrong – and the International Energy Agency’s middle-of-the road scenario suggests that it might be – Russia will enter an era of irreversibly falling oil prices with a largely unreformed economy.

The financial cost would be considerable. Quantifying the decrease is oil rent precisely is difficult, but academic Thane Gustafson uses reasonable assumptions to arrive at the following figures: by 2050, total export revenue from oil might be around 40% of what it was in 2019, in real terms, while the state’s share might be around one-third of its 2019 value. The shortfall might be reduced by an increase in revenue from other sources, such as exports of agricultural goods, metals and nuclear power, but they are highly unlikely to make up the deficit entirely. Russia’s balance sheet would thus weaken in the 2030s and weaken further as the energy transformation intensifies.

So far, little academic work has explored how the energy transformation and the associated decline in oil rent will affect Russian politics and society, and the country’s foreign and security policy. Here, I present four initial ideas:

Economically weakened, Russia would probably pose an even graver threat to its neighbours and the West than it does today

The era of chronic budget deficits may well begin at around the time that Putin hands over power to a successor (recent amendments to the Constitution allow him to rule until 2036). That successor would therefore take office on the eve of a social and political crisis. He would have less patronage to disburse among elites and less ability to pacify the population with handouts, making it harder to establish his legitimacy and increasing the risk of a disorderly transition.
A permanent decline in oil prices would probably force Russia’s post-Putin leadership to confront structural economic and social problems that have not been addressed since the collapse of the Soviet Union. One is the continued existence of value-destroying industrial enterprises that provide employment and essential services for hundreds if not thousands of towns and cities across Russia’s landmass. With much less oil rent available to subsidise them, these enterprises would have to be closed down, with the risk of triggering mass protests and social unrest.
This unsettled situation inside Russia would probably heighten feelings in the Kremlin of vulnerability and contribute to even greater tension between Russia and the West. Russia’s leaders, particularly the heads of its security services, would almost certainly believe that the West was fomenting unrest with the aim of staging a ‘colour revolution’, and exploiting its weakness to further curtail Moscow’s influence in Eastern Partnership states. Hardliners would probably resurrect the conspiracy theory that the green agenda is a Western plot designed to undermine Russia. Economically weakened, Russia would probably pose an even graver threat to its neighbours and the West than it does today. It would still think of itself as a great power but would have higher threat perceptions and fewer non-military options available to achieve its goals, while retaining military (and cyber) forces capable of achieving rapid victories in limited conflicts arounds its borders. In such circumstances, it is a realistic possibility that the temptation to use these forces would grow.
The energy transformation is likely to reinforce Russia’s economic dependence on Asia (and on China in particular), because whereas European demand for oil, gas and coal are projected to decline relatively rapidly, Asian demand will probably remain stronger for longer. Growing dependence on Beijing risks undermining Russia’s autonomy in foreign and security policy. That would be a bitter pill to swallow for a leadership that values sovereignty over almost everything else.

Given the potential of the energy transformation to destabilise Russia and increase the threat it poses to the outside world, now is the time for policymakers to think creatively about how to give Russia a greater stake in the transformation and to prepare for the growing dangers to come. The future may arrive faster than we think.