Russia 2030: Development after fossil fuels?

ALEKSANTERI INSIGHT 3/2017. The long-term future of Russia’s fossil fuel reliant development model is uncertain, writes Pami Aalto.

Since the 2000s, exports of oil, oil products and natural gas have covered some two thirds of the state budget of the Russian Federation. Hence, these resources have helped to modernise the state and society, including key infrastructure and state institutions responsible for the welfare and education systems, while they have also bolstered Russia’s foreign policy influence, security services and military capability. Some observers even claim that fossil fuels have shaped Russian identity and culture.

However, by the 2030s, this development model may face major constraints. First, many EU Member States – the main market of Russian producers – are planning policy measures which will decrease the use of oil in particular. In the transport sector, Germany and the Netherlands are considering banning the sales of cars running on oil. Finland seeks a 40% share for biofuels alongside measures supporting the market entry of electric vehicles. Finnish homeowners are switching from oil-based heating solutions to heat pumps. A similar trend may occur in Central Europe, where natural gas is a major source of residential heating. Although heat pumps consume electricity, this should increasingly come from domestically available renewable sources.

Second, we may ask if the existing vested interests of industries, incumbent energy producers and pathdependencies in European societies will seriously hamper the intended transition away from coal, oil and eventually also natural gas, which releases less greenhouse gases than the two other fossil fuels. If this transition proves slow, a policy push will nevertheless continue away from Russian fossil fuels in Europe. Many EU Member states are developing liquefied natural gas infrastructures as an alternative to Gazprom’s pipeline gas. The EU supports an interconnected infrastructure enabling wider gas-to-gas competition – where Russian gas competes with Norwegian, Qatari, North African gas, etc. The remaining potential for developing biogas supply may also squeeze Gazprom’s markets.

Third, it is true that Russian exporters are developing new oil and gas transport infrastructures to reorient trade towards Asia and other markets. However, competition is also tightening there. Natural gas from the USA (shale gas), Australia and Myanmar is increasing the competition for Russian producers. Japanese car manufacturers are also leading developers of electric vehicles. The biofuel market is expected to grow in South-East Asia. Fourth, can Russian actors switch to producing electricity from the country’s rich renewable sources, exporting to Europe, if carbon neutral electricity is what Europeans increasingly want? Unfortunately, not many wish to remember what once was a vision of a pan-European electricity market, including Russia.

All of this is not to ignore how Russia produced record levels of oil in 2016 while natural gas production remained strong. In light of the trends sketched above, the question is how long this party will continue. Most likely, we will see lower prices than through most of the 2000s and early 2010s. And with sanctions in place since 2014, the institutions of the EU-Russian energy dialogue have not been able to restore trust. As a result, the Russia we see in 2030 may not be the one we currently see.

Pami Aalto is Professor of International Relations at the University of Tampere, the Director of the ELTRAN consortium and Team Leader at the Academy of Finland Centre of Excellence, ‘Choices of Russian Modernisation’.