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[Clara Ferreira Marques] Reality is dragging Russia toward climate acceptance

Could climate alarm bells be ringing in the Kremlin? Official pronouncements and a newfound urgency suggest the reality of greener global demand may finally force a fossil fuel behemoth to accept the inevitable.

Last week, in a ministerial meeting that touched on environmental monitoring, President Vladimir Putin warned officials that over the past four decades or so, temperatures increased in Russia nearly three times faster than the global average. He noted climate change was behind wildfires sweeping across Siberia. Earlier, he had dedicated a significant portion of April’s state-of-the-nation address to climate, flagged it as an area of potential cooperation with the United States and ordered officials to draw up an emissions reduction plan, due by October. Quite the change of tone for a leader who once mocked renewable energy.

There’s no Damascene conversion here -- this is not enthusiasm or, yet, substantial action. But realism is progress. Legislation signed last month requires businesses to report their greenhouse gas emissions, among other provisions, hardly groundbreaking but a necessary step toward an eventual trading system, and, crucially, a statute enacted after years of discussions. A hydrogen plan is good news too, even if nonrenewable sources are still too prominent.

Sooner than expected, Putin’s hydrocarbon-dependent regime has found itself watching key markets slip away as China targets net-zero emissions and Europe introduces measures including a levy on heavy industry imports that fail to meet its climate protection standards. Having lauded the economic benefits of warmer temperatures and resisted transformation for years, Moscow has been caught unprepared and is now adding up the cost of inaction -- estimates vary, but the European carbon border tax alone could mean as much 3.8 billion euros, or $4.5 billion, annually for Russian exporters, according to KPMG. There’s also the even less appealing prospect of being left behind technologically.

Simply, transition has not been left to the world’s energy producers or to exporters of energy-intensive products. Consuming countries, with plenty of incentive to go green, are the ones dictating the pace and they will move, with or without Moscow. The debate is thus less about climate leadership and more about risk management.

The European Union is Russia’s biggest trade partner -- roughly two-fifths of its exports went to the bloc in the first half of 2021 -- and a chunk of that is in carbon-intensive areas hit by the new levy, like steel, fertilizers and cement. And that’s before even considering the nation’s eye-watering bill from the impact of extreme weather and melting permafrost, which Alexander Kozlov, minister for natural resources and the environment, estimated earlier this year could add up to more than $67 billion by 2050, given the impact on crucial infrastructure.

Russian companies, especially the more nimble or those directly affected by the European tax, are already changing tack, edging toward net-zero targets. Russian aluminum giant United Co. Rusal International PJSC has said it plans to split its green metal from more polluting assets. An imperfect fix, if it goes ahead, but one that may still have a positive ripple effect in the long run.

On top of this, consider how Russia’s wider economic incentives are changing: Fossil fuels are no longer the growth engine of yore, with oil output at or close to the peak. Not to mention that climate is an area where Russia can speak as an equal partner, unencumbered by sanctions.

Russia still has plenty of political reasons to stick with the dirty stuff, especially if prices hold, and to keep developing Arctic oil and gas. It’s still the world’s largest primary energy exporter. Authoritarian regimes are inflexible and Russia’s elites lean heavily on hydrocarbons. While some corporations have shifted, oil majors like Rosneft Oil that underpin the Russian polity are still not reckoning with the pace of environmental transformation and fail to look far enough ahead.

But acknowledging the problem is, as they say, the first step, and there are pragmatic moves Moscow can already take. The first is to work toward its own domestic carbon pricing system. It’s not a near-term prospect, but given Russia’s track record of competent and pragmatic financial administration, it is possible -- and an effective way of keeping the cash in Russia.

The second is supporting investment in green sectors that don’t upend the system but boost technological capacity, a major concern for Moscow, and make money -- say, renewable energy, for which Russia has huge potential given its vast size. Even better, hydrogen, especially if low-carbon, which could have a degree of continuity with the existing energy structure.

One could even envisage that more visionary elements of government might even take the opportunity to push through other changes to boost Russia’s underwhelming efforts to diversify away from raw materials -- say, by easing rules on procurement that have done little for the bottom line and plenty to deter foreign investment.

The world is set on a greener path. At least Moscow is now recognizing that a source of strength is becoming a worrying vulnerability.

Clara Ferreira Marques
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. -- Ed.

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