LIAM DENNING: Russia, cause of climate change, and victim too

Growing up in the UK, my one certainty about Russia was that it was cold. Any winter freeze was liable to be blamed on an ill Siberian wind, and no TV footage of the place was seemingly complete without someone sporting an ushanka. This cold transcended the merely physical. Relations with Moscow were invariably either thawing or freezing, a result of our interminable and (thankfully) low-temperature war. 

Always a cliché, now even its kernel of truth is melting away. The world is warming, but Russia is warming faster. Besides the very soil, Russia’s finances and institutions will turn squishier as temperatures rise. And this all coincides with another imminent epochal shift in the political landscape.

President Vladimir Putin won’t be going to Glasgow for the COP26 climate summit, an event about which Russia is especially conflicted. Georgetown University professor Thane Gustafson has published two seminal works on Russia’s oil and gas industry in the past decade. His latest, Klimat, addresses its byproduct, climate change. On one hand, Russia has much to lose. Two-thirds of its territory consists of permafrost, where instability caused by melting is already damaging cities, pipelines and other infrastructure. Extreme weather events, including severe droughts and wildfires, are now much more frequent than when Putin ascended to power.

Yet Russia’s economy, and Putin’s own power, are tied overwhelmingly to the prodigious production and export of fossil fuels. So, from Moscow’s perspective, the energy transition could result in a stranded asset spanning 11 time zones. As Gustafson writes: “Russia is already one of the chief causes of climate change; but as time goes on, it will also be one of its chief victims.”

As Russia dangles the prospect of more gas to a fearful Europe, it hardly looks the victim today. But like climate change itself, the risks compound over time, and Russia may feel the heat as soon as the 2030s. By then, oil demand will likely either have peaked or plateaued. Gas demand may well hold up better, but policy-led restrictions will tighten, as will competition from renewable energy.

As it is, and as Gustafson detailed in his earlier books, Russia has already exploited much of the Soviet oil and gas legacy that enabled Putin’s reassertion of power after the chaotic 1990s. Even if demand proves relatively resilient, the higher costs of new resources will restrict the flow of rents. In other words, the costs of climate change will mount even as Russia’s resources to deal with them shrink.

The obvious strategy for Russia, as with other petrostates, is to diversify its economy. Yet oil and gas alone account for more than half of Russian exports. Moreover, subsidised domestic gas is woven into the social contract, encouraging demand: Russia uses more gas than the entire EU and, per dollar of GDP, five times as much as the US. Overall, in energy terms, the Russian economy remains a furnace, and thereby more carbon-intensive, relative to Western economies and, lately, even China.

In theory, Russia’s vast territory and scientific and industrial heft might lend themselves to, say, fostering a successful windpower sector. But what’s the incentive when you’re competing with discounted gas and potentially irking incumbent political interests? Wind accounted for 0.1% of power generation in 2020. As for electric vehicles — where neighbouring China has emerged as a market leader — Gustafson writes that driving one in Russia “takes a brave auto-owner indeed”. At just 122, this country of 17-million square kilometres has fewer charging stations than West Virginia.

So a Russian Tesla isn’t in the cards. Still, there are certain aspects of climate change and energy transition that may play to its strengths. Nuclear power is a Russian comeback story of the past two decades. Even so, its relatively small scale means it’s unlikely to make up much of the lost revenue from shrinking fossil-fuel receipts — especially given ambivalence to new nuclear plants in much of the West and rising competition from China, which seeks to export its own reactors.

Meanwhile, Putin has long gazed northward at potential opportunities arising from retreating Arctic sea-ice, opening up shipping lanes (and sites for military bases). The so-called northern sea route is potentially lucrative, shaving weeks off sailing times from Europe to Asia and providing easier access to global markets for new energy and mining projects in Russia’s far north. Such expansion wouldn’t come cheap, though; much of the inland Arctic’s development resulted from somewhat unorthodox Soviet cost-benefit calculations. New infrastructure risks becoming stranded if energy transition accelerates, even as the costs mount for shoring up older infrastructure.

One oft-cited silver lining concerns agriculture, where a warmer Russia might sprout more crops. This makes a certain sense until you literally dig into it. As Gustafson points out, melting permafrost is a slush of sand, soil and ice lacking the long accumulation of organic matter and activity that makes for fertile fields. Some marginal land may well open up. But any gains made on the thinner, thawed soils of the North will likely be offset by losses from drought and other extreme weather striking more frequently at Russia’s prime agricultural regions to the south.

Gustafson projects Russia’s export earnings may drop by a third by 2050. Another way to think about this is that, using 2019 data, just making up for a 10% drop in fossil-fuel exports would require Russia’s combined exports of nuclear technology, metals, agriculture and manufactured goods to rise by a quarter. That is already a tall order before even considering such curveballs as the EU’s proposed carbon tariffs, which are a particularly sore point in Moscow.

The added complication concerns Putin himself. He turns 78 in 2030 and, assuming he’s still president, will then have been running the show (mostly directly) longer than Joseph Stalin did. Russia’s elites will be jostling with vigour ahead of another transfer of power, just as climate change and energy transition are undermining the economy and the rents that act as political permafrost. 

As much as Russia recovered from chaos under Putin, it was recovery from a very low point and tied to commodity prices. Commentators may swoon today over Putin’s apparent geopolitical mastery. But he is playing two pairs well rather than holding a royal flush, and at a fortuitous point in the game. Moreover, thus far under his rule, dependence on extraction has deepened, and another cliché, Russia’s relative lack of commercial innovation, has held up all too well.

“A unique opportunity to use the legacy rents inherited from the Soviet period — to skim the Soviet cream, so to speak — and put them to work for the renewal of Russia, has been lost,” is Gustafson’s succinct and damning conclusion. Russia’s challenge is not merely the ground melting beneath it but the brittleness of the structure built on top.

Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion