President Putin didn't go to Glasgow. Understandably, argues economist Vladislav Inozemtsev for the website Riddle Russia. For the near future high prices for oil, gas and coal will guarantee him economic stability. To keep inflation down, the government will use the usual conservative medicine. There is no modernisation in sight: entrepreneurs and specialists leave the country and Russia is isolating itself. This shortsightedness leads to 'communism'.

Yearly wildfires in Siberian tundra proof climate change (picture Greenpeace)

by Vladislav Inozemtsev

This weekend, the 26th UN Climate Change Conference ended in Glasgow. It seemed Russia had finally started thinking seriously both about the process of climate change itself and about what the fight against global warming might entail for the country. Articles and interviews appeared in the Russian media warning of a ‘departing train’, a ‘change of elites’ and a fatal transformation of the world economy.

But it turned out that these were but empty words: President Vladimir Putin did not goto Glasgow; there are no clear-cut guidelines for decarbonisation in long-term development programmes; speeches by Russian officials, who openly state that the environmental agenda is being used by ‘world power centres in their interests’, look increasingly detached from reality. One gets the overwhelming feeling that the continuing rise in oil prices and soaring gas prices have forced the Kremlin to forget about what seemed to be a very serious problem.

Most of those who over the past few years have been touting how quickly petro-states will go bankrupt have proven to be just as wrong as those who have been claiming for a decade that Putin’s regime is doomed to collapse soon. Energy transitions are neither fast-paced nor dramatic. Today the world consumes more than 4 billion tonnes of oil and 7.7 billion tonnes of coal annually. Demand for these resources, not to mention gas, will not drop significantly on a global scale in ten or even twenty years. The decline of demand over the last two years was only caused by the pandemic. The achievable goal is to stop the marked increase in consumption, and nothing more.

According to recent estimates, the US, China and Saudi Arabia, despite the efforts of eco-activists, expect to increase, not decrease, fossil fuel production by 2030. At a time when even developed countries are still far from being fully self-sufficient in energy from renewable sources, this looks like a reasonable strategy.

Despite all the talks about shale gas and LNG, neither Gazprom’s sales nor prices have dropped. On the contrary, they have never been as high as they are now. This is why it is widely believed that, despite considerable price and demand fluctuations, the country’s economy and the well-being of its ruling class cannot be undermined. However, it is worth reflecting on what this entails.

Two trends visible

In Russia there are two identifiable trends.

First, there is the general attitude and reaction to what is happening. Calmness and even satisfaction will almost certainly dominate in the near future. There is still no reason to revise our earlier forecast that oil prices will reach $100 per barrel by the end of the year. Gas prices may stabilise at the level of $800–$1,000 per 1,000 cubic meters after the upcoming launch of NordStream2, an all-time record for Russian supplies (the Kremlin does not even benefit that much from the media hype, since it sells mostly at non-spot prices).

Assuming an average oil price of $100/ barrel and an average gas price of $800 per 1,000 cubic meters in 2022, the additional export revenues will exceed $210 billion compared to 2019, which is comparable to the entire National Wealth Fund. A similar surplus to annual foreign exchange revenues was observed between 2002 and 2007. So far, high prices for traditional energy sources will guarantee the current shape of Russian economy and politics for the coming five to seven years.

The second trend is the adjustment of economic policies inside the country. As export profitability rises, inflation will rise as well – prices in domestic and foreign markets are closely linked. In its attempts to keep inflation down, the government will use the only tools of administrative control it knows: from antimonopoly measures to ‘skimming off excess profits’ (this was discussedrather frankly during the recent talks between the government and metallurgists and in texts by Deputy Prime Minister Andrey Belousov, the main proponent of this ‘manual control’).

Perhaps the measures proposed by officials will replenish the state coffers (not exactly empty at the moment), but they do not offer any prospect, because all the talk of technological breakthroughs just makes one laugh: the general investment climate in Russia and the ongoing departure of specialists and entrepreneurs do not bode well for modernisation.

It is obvious that some sectors will receive a double blow: the metallurgists will not only be skimmed by Russian officials, but the Europeans will start levying carbon taxes on their products from 2023–2024, which, according to the most conservative estimates, may cost Russian exporters more than EUR 1.1 billion in as little as five years from now. Such taxes and levies may cause even greater economic damage to Russia than a trivial reduction in revenues from energy exports.

As long as the EU does not become an ‘environmentally friendly’ and ‘carbon-neutral’ zone, revenues to the Russian treasury from the extractive industries will increase, as the role of export-oriented manufacturing industries is weakening, partly by highly original experiments carried out by the authorities.

Unexpected consequences

As serious problems with sales of commodities in major markets will emerge (in our opinion by the end of the 2020s), Russia may turn out to be even more dependent on them than it was at the beginning of the Putin era. In combination with clearly visible trends in domestic politics, this is fraught with quite unexpected consequences.

Putin didn't come to Glasgow. He prefers lecturing the West for a selected audience, as at the yearly Valdai conference (picture Kremlin)

A little more than a decade ago, in the aftermath of the global economic crisis of 2008–2009, China for the first time experienced a significant reduction in external demand for its products (its exports increased eight-fold from 1995 to 2008 and ‘only’ by 45% from 2009 to 2020). The Communist Party responded to this with large-scale measures aimed at expanding domestic consumption.

The situation in Russia will be different: the reduction in oil, gas and metals exports can be compensated only by an increase in production of relatively useless industrial products (this is exactly what Oleg Deripaska and other critics of the Ministry of Finance and Bank of Russia policy are already advocating, demanding an increase in loans to machine-building and heavy industry as a whole).

Russia produced almost as much oil and gas in 2019 as the Russian Soviet Federative Socialist Republic did in 1989, and while the USSR exported 32% of its oil and 18% of its gas at the time, the figures for Russia in 2019 were 71.7% and 34.6%, respectively. For coal exports, the difference is even greater: 4.8% in 1989 and 44.8% in 2019. Figures for ferrous and non-ferrous metals are closer to those of coal rather than oil and gas.

In Russia decarbonisation and the change in the global economic reality at the moment are viewed from a purely financial point of view, in terms of declining foreign currency revenues, disappearing budget flows and falling living standards. However, it is equally (if not more) important how such a turn will affect domestic policy and the country’s economic development.

Russia is not just an oil addict, it is still firmly tied to the markets of countries that have declared ambitious decarbonisation goals. In 2019 more than 50% of Russian oil exports, 77% of gas and 48% of metallurgical products were shippedto the European market. So far, diversification includes China (which has also announced certain benchmarks in the area of the green economy): oil supplies to China in 2019 rose to almost 30% of total exports, and gas to 4%.

Changes in the global energy balance and taxes on products with a strong carbon footprint will require Russia to refocus on the markets of those countries that are not too closely bound by trade relations with the EU and North America – that is, on obviously less solvent customers. Additionally, the competition for these customers will be quite difficult, as Russia will not be the only one to face these problems. This ‘economic iron curtain’ could be similar to the one that existed during the Cold War, the difference being that the latter was built from within, and the former will be built from the outside.

Many experts, including Russian liberals, have repeatedly suggested that the inaccessibility of Russia’s oil markets or a significant drop in energy prices would deplete the financial base of Putin’s regime and force the country to modernise. From the point of view of the abstract logic of economic development, this is indeed the case. But one should bear in mind that this modernisation can only take place in an economy open to the world.

Without modernisation Russia will become more and more dependent on energy resources

Nowadays Russia has chosen an entirely different path, and it certainly will not open up to those who undermine the foundations of its so far materially decent existence. Moreover, Russia is lacking the intellectual, rather than material, resources for modernisation. Also, there is no management system in place that takes into account modern trends and realities.

If the decarbonisation process worldwide gathers pace after a certain stall, in the future we will witness the manifestation of communist tendencies; in the West they will manifest themselves in the form of control of the forces of nature and the realisation of the slogan ‘from each according to their abilities, to each according to their needs’, while in Russia they will materialise in that wild image of political totalitarianism and planned economy from which we seem to have escaped thirty years ago. Although such a reaction on Russia’s part to the new technological revolution seems most likely, it is often disregarded.

This article was published by Riddle Russia.