International Politics

	Vol. 224 No. 7
JACQUES SAPIR, CONTRIBUTING EDITOR, FSU

Russia and the Kyoto Protocol: It's all about oil and gas, stupid! As often said, the road to hell is paved with good intentions. But, could a “good” decision be made, if not for bad reasons, then for reasons not directly connected with the decision's moral content? If we look at how the Kyoto Protocol (K.P.) debate is evolving in Russia, the answer seems to be “maybe.”

Minister of Economic Development and Trade, German Gref, is in charge of this contentious issue. Given that fact, plus whatever protests may be staged by the presidential economic advisor, Andrei Illarionov, I believe that Russia will, at last, ratify K. P. by the end of 2004. However, hot air, global warming and CO₂ have probably counted for very little in the evolution of Russian thinking.

Some people have talked of a Brussels-Moscow deal, whereby ratification would be bartered for European support of Russia's admittance to the World Trade Organization (WTO). This could be a factor, but probably a minor one. Russia's elite now understands that WTO is not an easy solution to their problems. This is understandable, when one looks at Russia's export structure. Wonder of wonders, it's all about oil. This may seem outrageous, but it's not when one examines Russian growth.

Russia's economy boomed during 2003, and it is on the way to doubling that result by 2005. Since 1999, growth has been a continuous process. Of course, it was badly needed. Even with last year's impressive result, Russia's GDP is still under its 1991 pre-transition level. The country is poor, but moving forward and fast. Growth is not just related to world energy prices, so one can reasonably assume that the current trend will go on for some years.

The target set by President Vladimir Putin in 2002, which was to double GDP by 2010, now looks like a real possibility, except for one thing. If Russia continues to use energy as ineffectively as it does now, oil and gas exports will shrink. To say that Russia wastes energy is an understatement, as data indicate in the accompanying table.

Most Russian observers have thought that citizens' wasteful habits – it's difficult to find a place, be it a flat, a hotel room or an official building, at less than 24°C (75.2°F) in the depth of Russia's winter – were the main culprits. However, these experts are basically wrong. The main energy guzzler was, and still is, industrial usage. To cast one ton of iron, Russia uses four times the energy required in France and Germany. The most intensive industries are ferrous metals, construction materials, chemicals and machine-building/ metal-working.

If we assume that growth continues at 6% annually until 2010, then the impact of energy efficiency or, more accurately, inefficiency, can be better seen. Accordingly, three distinct scenarios are calculated for 2010.

All three scenarios assume the same GDP growth rate and the high-range figure for primary energy output, as asserted in official Russian documents. In the “inertial” scenario, where the energy efficiency index does not change, surplus energy would drop to 83.2 million toe from 381 million toe. Russia would thus lose its position as a major oil exporter. However, if Russia could even reach the US energy efficiency level (not particularly ambitious), it would nearly double its oil export capacity.

There is another way to explain the same thing. To produce one more Russian toe/ year, one must invest the equivalent of 180 Euros. To save 1 toe/ year only requires investing between 89 and 126 Euros, depending on the activity targeted. So, figuratively speaking, the most promising Russian oil and gas fields are not in the Arctic Ocean or Eastern Siberia but in improving energy efficiency.

Funding for projects dedicated to improved energy efficiency is still a large problem. The Russian banking system is not ready to engage in anything with a maturity longer than one year, and financial markets are ineffective. The answer probably lies in a mix of public-private initiatives.

Here is where K. P. becomes significant. Even if the US does not ratify it – a position that could become quite difficult after Russian ratification – Russia could sell carbon rights to other countries. A recent study commissioned by an MIT-sponsored task force has estimated possible Russian gains from this strategy, for the 2010-2040 period, at between US$389 billion and US$411 billion. This equals US$12.9 billion to US$13.7 billion per year (A. Bernard, et al., MIT joint program on Global Change report No. 98, June 2003). Proposals in this national strategy could significantly improve Russia's energy balance and make its fast economic growth highly compatible with K.P. requirements for decades.

Thus, contrary to what is sometimes said in the Russian debate, implementing K.P. would not harm growth and could even be used to channel funds toward modernization projects. This means that we do not have to wait for Putin to “turn green” to see ratification. After all, it's about oil and gas, stupid! 

Editor's note: More details on this subject can be found in Jacques Sapir's paper, “The strategic relevance of improving energy use efficiency for Russia. Evaluating the recent Russian industrial growth pattern and assessing how the energy sector contributed to it,” downloadable at http://www.ehess.fr/centres/cemi/pages/evenements.html.

Jacques Sapir is professor of economics at EHESS-Paris and at the Higher School of Economics in Moscow. He is a regular contributor to this column.