Economy, Europe

Shift to clean energy may adversely affect Russian economy, its ties with EU

Oil, natural gas exports constitute almost 40% of Russian budget

Emre Gürkan Abay   | 08.10.2021
Shift to clean energy may adversely affect Russian economy, its ties with EU

MOSCOW

The shift to clean energy in Europe as part of the Green Deal will not only have strong long-term effects on EU-Russia energy relations but also will impact the economy of Russia, one of the world's largest hydrocarbon producers.

The Green Deal aims to alter the way energy is produced and consumed in the EU countries, reducing greenhouse gas emissions by at least half by 2030, compared to 1990 levels, and achieve climate neutrality by 2050.

However, such a large-scale plan will impact the EU's relations with the majority of energy-producing countries, particularly Russia.

According to the International Energy Agency report on EU’s Energy Policy Review 2020, renewables accounted for an 18% share in the EU’s gross final consumption in 2018. This indicates that over three-quarters of energy consumed in the EU comes from fossil fuels.

Oil dominates the energy mix with a 34.8% share, followed by natural gas and coal at 23.8% and 13.6%. With the implementation of the European Green Deal, the composition of the current energy mix will undergo serious changes.

“The first impact will be on coal and oil imports from Russia. Especially coal, the most polluting fossil fuel, will be progressively phased out in Europe. Then we will also see an impact on oil imports and after 2030 especially, we’ll see a progressive decrease in these imports,” Marco Siddi, a senior research fellow at the Finnish Institute of International Affairs, told Anadolu Agency.

The future of the EU-Russia energy-related ties depends on the actual phase of the energy transition in Europe, Siddi said, adding that the evolving perception of gas in Europe as either a transition source or as just another fossil fuel pollutant would also be another factor to consider.

“So, during the last five years, this perception has fluctuated quite a lot with gas now being more critical,” he said, but also stressed that “all the rhetoric documents being published are suggesting that the EU is rather serious about the transition.”

“Even though in the current situation the gas market would suggest otherwise, we will, most likely, not see new long-term contracts. However, in the long term, I think we will see more spot prices,” he added.


Declining share of oil revenues may cause serious damage in Russian economy

Speaking at a workshop, Mechanisms of state carbon regulation: possible consequences for the Russian economy, on Sept. 26, Anatoly Chubais, the former Russian deputy prime minister, pointed to the tendency of global economies to reduce the use of carbon resources, and warned against its considerable effects on Russian exports.

Chubais said this green transition may cause a 10% loss in Russia's gross domestic product. “This is more than serious,” he said.

Former Russian Finance Minister Alexei Kudrin said oil and gas revenues currently account for one-third of the Russian budget, and the country should shift away from this scheme within the next 10-15 years.

One of the world's largest energy exporters, Russia’s oil export revenue decreased by 40.8% to $72.3 billion in 2020 year-on-year. Oil and natural gas exports constitute almost 40% of the Russian budget.


Carbon border adjustment mechanism challenge

The second challenge for Russia is the carbon border adjustment mechanism that the EU plans to introduce.

The bloc wants to introduce a tax related to the volume of emissions caused by the production of imported goods. The tax mechanism concerns the goods that consume a significant amount of energy to produce and transport. In the case of Russian exports to Europe, these include metals, fertilizers, and chemicals. With the introduction of the cross-border tax mechanism, 42% of all Russian exports to the EU are estimated to be in the scope.

The Russian government is expecting a revenue of around $130 billion from oil and natural gas exports next year. According to experts, this revenue may drop by $110 billion dollars within just two years due to regulations that result from the Green Deal.

* Writing by Sibel Morrow in Ankara

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