The Land & Climate Podcast

Will the Russian economy survive fossil phase-out?

November 25, 2022 Land and Climate Review
The Land & Climate Podcast
Will the Russian economy survive fossil phase-out?
Show Notes Transcript

Lauren Sneade talks to Thane Gustafson about the future of Russian oil through the climate crisis and the context of the ongoing war in Ukraine. Gustafson is a professor of political science at Georgetown University, and an author of numerous books about Russia's fossil fuel dependence, the most recent being 2021's Klimat: Russia in the Age of Climate Change.

Lauren and Professor Gustafson discuss the question: is Putin promoting a geopolitical narrative of Russian supremacy over the country’s national economic future?

Further reading

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Lauren:

Hello, you're listening to the Economy, Land and Climate Podcast. I'm Lauren Sneade and in this episode, I'll be talking to Thane Gustafson, Professor of Political Science at Georgetown University, about his new book 'Klimat - Russia in the Age of Climate Change'. We'll be talking about how climate change and the Ukraine War has affected Russian oil demand, and what that means for their future economy.

Thane:

The question of the decade, isn't it? To try to fathom the mixture of motives in Putin's behaviour. Certainly, what we are seeing here is that geopolitics in his mind, the geopolitical narrative, the greatness of Russia, Russia's historical inheritance, the common origin of Russia and Ukraine. All of those geopolitical stories have trumped Russian economic interests.

Lauren:

I asked Thane to introduce his recent book, 'Kilmat, Russia in the Age of Climate Change'.

Thane:

The Klimat book appeared in September of last year, just before the invasion. And so I'd like to describe the main lines of the book, which I think remain valid, and at the same time to update your listeners on the consequences of the Russian invasion, which are already considerable. The idea behind the Klimat book is a thought experiment. And the book asks, 'what if peak oil demand turns out to be real? And what if gas demand after growing for the next decade or two, ends up stabilising?' So the real question is, 'what if the energy transition becomes the driving force behind the energy economy? What would the consequences be for Russia?' Because as we know, Russia depends very much on hydrocarbon export revenues, both oil and gas, and then also some nuclear and some coal. So the idea was to look beyond the controversies over Russian oil and gas and to focus on the long term from basically today to mid century. And the idea is that climate change by the 2030s will return to the fore as the crucial issue for Russia, and not so much because of internal damage, although we hear a good deal about melting permafrost and the impact of extreme events on agriculture, but because of the external impact of peak oil demand on revenues from oil exports. And the main proposition of the book is that Russia has no adequate alternatives to export revenues from oil, pipeline gas, and coal, if those start to decline. If that happens, then the Russian state would be severely impacted, and it will enter an era of chronic budget deficits. And this would occur just about the time that Putin, who is now 70 years old, leaves the scene. And so the basic proposition is that there is a two stage scenario ahead, that in the 2020s, oil demand will remain strong, gas demand will continue to grow, there will be a strong market for Russian coal. And at that time, at the time the book was completed, it looked as though Europe would continue to take Russian gas and that Russia would continue exporting it to Europe as it has for a half century. And so the outlook at the time was that the energy transition would be slow, that beginning in the early 2030s, the effects of the energy transition would become dominant. And from that point on, it is climate change that will be the main driver of Russia's export revenues. And by the 2040s Russia's export revenues start to decline rapidly and irreversibly. And so behind this thought experiment, and this is what much of the book consists of, is an investigation of what else Russia has got. So there are chapters on oil and natural gas, on coal, but also on renewables, where the Russians have so far achieved virtually nothing, the revival of Russian nuclear power, the agricultural renaissance of Russia, which has been quite impressive over the past 30 years, and then Arctic policy, where the Russians have been developing LNG. And there's also a chapter on metals - that's looming, of course, as something increasingly important, particularly in the area of rare earth metals and other elements such as lithium. And so adding one thing and another, the bottom line is that Russia will be very seriously impacted because it doesn't have alternatives. Just to quote a couple numbers - in the last normal year, 2019, Russia's revenues, export revenues from oil and gas alone were in the neighbourhood of $260 billion in one year. And if that declines, let's say by 50%, you get a sense of the impact that that will have on the Russian state budget and on the Russian economy. Agriculture might provide 45 of that metals might provide 30, weapons, despite the fact that we hear a lot about Russian weapons, maybe 15. So all of that from going around the perimeter, so to speak, of all potential alternative export revenues, we come up with numbers that are way lower than what the Russians had been making as recently as 2019. Now, how has the invasion changed the picture? This was a surprise for everyone, pretty much, and a shock for everyone. And it has certainly aggravated a situation where, over the next decade, we are seeing a energy economy that is severely disrupted. We are seeing changes in the supply of oil, such that oil prices have gone way up, but that there is a continuing strong demand for oil, including Russian oil. The big question, of course being whether sanctions will constrain the supply of Russian oil on the world market and what impact, what further impact that will have on oil prices. The big change, however, and this is having an impact right away, is the disruption, in fact the destruction, of Russia's gas market in Europe. And this is an unexpected event. As I mentioned, the Russians over the last half century, had been developing their gas market in Europe, they had spent a large amount of money to develop the next generation of gas for the European market, five pipelines to match. And now Putin in effect, it is Putin, has dropped a bomb on Russia's gas market in Europe. So the big change in the book, compared to when it was published just in September, is that the Russia's gas export revenues to Europe, are going to disappear within the next two, three at most five years. And that will not be repairable because the Europeans have learned that when push comes to shove, the Russians will weaponise their gas supplies to Europe and consequently, to protect themselves, they have to diversify, and cut out Russian import, gas imports into Europe. So that's the big change there. The oil revenues are likely to continue to increase, though over the next five to 10 years, I personally am skeptical that the coming oil embargoes are going to be enforceable. But we'll see. This is something that's never been attempted before. But the essence of the book's story, that is to say that after the 2030s climate change returns to the fore. That remains, I think a good projection. And consequently, the accelerating decline in fossil fuel export revenues after the 2030s remains a plausible scenario. And so does the lack of plausible alternatives for the Russians. So that summarises the core of the book, but also the changes that have taken place in the wake of the Russian invasion.

Lauren:

My question when I was reading this book, in the way that you talk about the projected decline of global oil demand, how many people are of that opinion in Russia, that people won't want to buy what they're selling?

Thane:

It depends on what Russians one asks. The first thing to note is that climate science is highly developed in Russia, it has been since Soviet times, and Russian climate scientists, along with their Western colleagues, were very quick to pick up on the phenomenon of increasing greenhouse gas emissions, very quick to understand that the consequence would be global warming, and they've been sounding the alarm for some time now. The big question is whether official Russia has been listening and what the response of Russian business has been. In the five years, I would say, beginning around 2017 or so, the very striking thing is that the peak oil narrative started to arrive in Moscow via several channels; the projections, the models of the major oil companies were unanimous on the subject that peak oil demand was real and dip in the oil company would kick in in the late 2020s or early 2030s. That was one voice official Russia was hearing. Various think tanks with their models, Bloomberg, New Energy Finance, was another voice. And all of these were coming into Moscow chiefly by way of various consultancies, and think tanks that are present in the scene, on the scene, or at least were present on the scene in Moscow until the time of the invasion, the most outstanding one being the Skolkovo Institute, [a] relatively recent creation, which had an energy team that was very much a convert to the terminal, to the peak oil demand scenario, and was communicating that to various ministries. And various Russian ministers were on board with the basic story. Russian business was split. The fossil fuel industry, as you can imagine, quite conservative, tended to be on the denier side, or at least downplaying the consequences for the Russian economy and for their own companies. Some Russian companies, however, were vulnerable to ESG pressures from the West, the Russian Aluminium Company RUSAL has Western shareholders, mined bauxite in Africa depends, is quoted on international exchanges. So those people were more receptive to the vulnerabilities of Moscow to this message. Then the crucial question is, 'what about Putin himself?' Well, Putin at first dismissed the whole thing. Then he gradually started to come around. And he acknowledged that the scenario was plausible. But he insisted two things. One is, 'we have the cleanest energy footprint in the world, because we are a gas fired economy'. Well, that much is true. The other thing he said is 'look in comparative perspective in the global economy, our comparative advantage is fossil fuels, we'll go with what we've got.' And then finally, Russia's main official answer on the global stage, notably the latest COP27 in Egypt has been 'our answer is forests. Our big asset is forests, they absorb tremendous amounts of CO2. And therefore, even if we remain a fossil fuel fired economy, which is pretty much inevitable, our forests will continue to absorb a great amount of that CO2 emissions.' So that gives you the spectrum of Russian responses. On the eve of the invasion the Russians had come a long way over the last five years. The public, however, remained very largely outside this discussion.

Lauren:

So you're saying that that was on the eve of the invasion? What happened after the invasion?

Thane:

The simple answer is that this invasion, which seems to have been in so many respects improvised by the Kremlin and by Putin himself, has been a disaster for the Russian military. It has also been disruptive for the Russian economy because of the wave of sanctions that followed the beginning of the invasion. The sanctions are on a scale and on a scope that has never been attempted before. It is truly amazing. No one has attempted to impose sanctions on such a scale with such a sweep on a major economy. And we'll see what the total impact over the long term turns out to be. In the near term, the Russians have largely succeeded in taking steps to stabilise their finances. They have continued to press for oil exports. And by and large, they have succeeded in cushioning the impact of the sanctions, but the invasion itself and then the repercussions of the invasion for official Moscow have been so disruptive that you might say normal political life has been interrupted. And climate change in particular has receded into the background. Russian companies are talking less and less about it. They continue to oppose such measures as a carbon tax. Even the most elementary measures have been opposed by Russian business and they continue to be. Putin has other things on his mind. He has a small circle of advisers, who mainly represent Russia at various international conferences. The experts on climate change whom I mentioned, the Skolkovo Institute and whatnot, many of those have left Russia. The public was never very much engaged in the climate change story. They were mainly focused on things like trash and waste at the local level so they were not players. To draw the bottom line, since the invasion climate change has pretty much vanished from the agenda of official Moscow.

Lauren:

And one figure who recurs throughout your book who I thought was really interesting was a man called Anatoly Chubais, can you tell our listeners a bit about him and what he did in terms of clean energy in Russia, and the way that climate change was being presented?

Thane:

That's a fascinating story and it's an important one, you're quite right to go there. First, to sketch a little bit the significance of this person over the last 30 years, he's one of the original St. Petersburg reform economists who sprang up in the late '80s, the early '90s, and then migrated to Moscow, many of them before Putin, some of them with Putin. And in the early 1990s, Anatoly Chubais became well known to Western investors and Western governments as the head of the privatisation committee that oversaw the mass privatisation of the Russian economy, and particularly the natural resource companies and the oil industry in particular. A lot of that was hastily done, was surrounded by scandals, Chubais was not himself personally corrupt, but a lot of corrupt people took advantage of and profited from this privatisation. But Chubais then moved on to you might say a second career. Putin put him in charge of reforming the electricity sector, and he did a very effective job of that, basically by taking apart the Russian electricity monopoly and creating a collection of competing local energy generators, and basically created a market in electricity. And he was given high marks for that. Basically, he followed the path of similar reforms in power industry in the United States and elsewhere in the world. After finishing with that, he went on to be named by Putin the head of Rusnano, which was a state owned, partially privately owned venture capital firm, to promote high tech. And as part of that he became very much a missionary for renewables across Russia, solar and wind in particular he was promoting and investing in. Thanks to Rusnano, the venture capital company, he was appearing everywhere, speaking before audiences, campaigning, basically a one man band for renewables. Now, bear in mind that Russia has a comparative advantage which is overwhelming, and in particular, natural gas. This is a gas fired economy as I said before. Renewables are a very tough sell compared to the abundance of gas. And it's fair to say that Anatoly Chubais made very little headway and at this moment, Russia has very little to show in the area of renewables. And in fact, last year, Putin relieved him or fired him, I don't know what the exact story was, and effectively gave him an honorary retirement by naming him Russia's representative to international organisations in global economy. It was shortly after that that the invasion broke out. And at this point, Chubais was effectively removed from any significant policymaking role. The striking latest round in this story is that as soon as the invasion took place, within days Chubais left Russia, and he was ill, he ended up in a hospital. That was unconnected, but then he seems to have recovered. And he's moved on to I believe Berlin. The remarkable thing about it is that this is far and away the most famous, the most notable figure in Russian economic reform, privatisation, reconstruction, and climate change policy over the last 30 years, and now he has left Russia with consequences unknown.

Lauren:

That's interesting. I mean, from everything you've said, it's clear that Russia needs the global market both in terms of exports and importing pretty much everything. And would Putin admit this? And how does Russian dependency on the global market do you think impact his decisions in the Ukraine war?

Thane:

That's the question of the hour and the question of the decade, isn't it? To try to fathom the mixture of motives in Putin's behaviour. Certainly what we are seeing here is that geopolitics in his mind, the geopolitical narrative, the greatness of Russia, Russia's historical inheritance, the common origin of Russia and Ukraine, all of those geopolitical stories have trumped Russian economic interests. I've already referred to the destruction of Russia's gas export market in Europe. It will not be replaced by any pivot to the East anytime soon. Russia simply is going to suffer from mounting economic damage from its increasing isolation in the world economy. And this will be Putin's doing. How these different factors interacted in his mind, I don't think anyone knows except that the consequences are quite visible.

Lauren:

Well, thank you very much for listening. That was Thane Gustafsen, Professor of Political Science at Georgetown University. You can buy 'Klimat - Russia in the Age of Climate Change' published by the Harvard University Press from all good bookstores. We've been the Economy, Land and Climate Podcast - follow us on Twitter @ELCinsight for more economy, land and climate.